Financial Performance Analysis of Mol Group Regarding the Price Volatility of Oil Be- Tween 2014-2018 David Kocsis

Financial Performance analysis of Mol Group regarding the price volatility of oil between 2014-2018 David Kocsis

Bachelor’s Thesis Degree Programme in International Business 2019

Author David Kocsis

Degree programme International Business Report/thesis title Number of pages and Financial Performance analysis of MOL Group regarding the price vola- appendix pages tility of oil between 2014-2018 72 + 6

2014 saw the decline of oil prices, causing many oil and gas companies to rethink their strategies as OPEC production cuts did not bring any long-term results. The aim of this research is to provide a financial performance analysis of Mol Group regarding the price volatility of oil. Information is obtained from the company’s public annual reports and extracting and analyzing results from its official financial statements between 2014-2018.

Financial performance by segment is analysed to give a holistic picture about the company’s main cash flow generator during oil price volatility. Another analysis that is investigated in depth in financial statement analysis of Mol Group, includes trend analysis and vertical analysis of the balance sheet and income statement between 2014-2018. The results will be compared against the oil price fluctuations during the same period to determine which part of the company’s financial statements were affected the most.

In order to determine to what extent did the oil price decline effect Mol Group’s financial performance, key financial ratios will be analysed between 2014-2018 as part of financial statement analysis. Benchmarking these financial ratios against its largest local competitor OMV gives an idea about the performance of the company. The key financial ratios that will be analysed includes profitability, liquidity, financial leverage and shareholder equity ratios.

The major key findings focused on Mol Groups ability to generate positive cash flow even during lower oil prices due to exceptional performance by its Downstream division, while its Upstream division generated much less cash flow. As net sales revenues declined, operating profit and net income turned negative due to oil prices falling in 2015, resulting in working capital being negative as well during lower oil prices between 2014-2016. Profitability, liquidity leverage and shareholder equity ratios were negatively impacted during 2015 when oil prices declined the most, except EBITDA margin and debt to EBITDA ratios which have improved due to operating cash flow exceeding capital expenditure. Solvency ratio improved as well due to lower levels of debt. From 2016 sales revenues, operating profit and net income started to increase and all financial ratios have improved as well due to Mol Group having lower operating expenses and capital expenditure, while oil price increase generating higher operating cash flow. MOL managed to outperform OMV in profitability ratios while OMV outperformed MOL in liquidity ratios between 2014-2018.

In conclusion, Mol Group managed to perform well during low oil price environment excluding 2015 when it made considerable losses, due to its integrated business model, involving both ex- traction and refinery of crude oil that generated high operating cash flow throughout the period. Keywords Financial statement analysis, financial performance analysis, financial ratios, ratio analysis, benchmarking,

Table of contents 1 Introduction ...... 1

1.1 Background of the thesis topic ...... 1

1.2 Research Question...... 1

1.3 Demarcation ...... 2

1.4 International Aspect ...... 2

1.5 Benefits ...... 3

1.6 Risks and Risk management ...... 3

1.7 Key concepts ...... 3

1.8 Case Company ...... 4

2 Financial Performance Analysis regarding financial ratios and benchmarking ...... 7

2.1 Financial statements analysis ...... 7

2.2 Vertical & Horizontal analysis ...... 8

2.3 Financial ratio analysis ...... 8

2.4 Financial Benchmarking ...... 9

3. Research methods ...... 9

4. Financial Performance analysis ...... 11

4.1 Net sales revenues ...... 11

4.2 Operating profit/loss (EBIT) ...... 15

4.3 EBITDA ...... 19

4.4 Net Income ...... 22

4.5 Working capital ...... 24

4.6 Capital expenditure ...... 25

4.7 Operating Cash flow ...... 27

4.8 Free Cash flow ...... 29

5. Financial Statement Analysis ...... 30

5.1 Horizontal analysis ...... 31

5.1.1 Horizontal analysis of Income Statement ...... 31

5.1.2 Horizontal analysis of the Balance Sheet ...... 37

5.2 Vertical analysis...... 45

5.2.1 Vertical analysis of the Income Statement ...... 45

5.2.2 Vertical analysis of the Balance Sheet ...... 48

6. Financial Ratio Analysis ...... 53

6.1 Profitability Ratios...... 53

6.2 Liquidity Ratios ...... 59

6.3 Financial leverage Ratios ...... 62

6.4 Shareholder Ratios ...... 68

7. Discussion ...... 71

7.1 Key findings ...... 71

7.2 Conclusion ...... 72

References ...... 73

Appendices ...... 78

Appendix 1. Horizontal analysis of the Income Statement between 2014-2018 (USD mn) 78

Appendix 2. Horizontal analysis of the Balance Sheet between 2014-2018 (USD mn) ...... 79

Appendix 3. Vertical Analysis of the Income Statement between 2014-2018 (USD mn) ....80

Appendix 4. Vertical analysis of the Balance sheet between 2014-2018 (USD mn) ...... 81

Appendix 5. Consolidated Cash flow statement between 2013-2018 (USD mn) ...... 82

Appendix 6. Financial results by segment between 2013-2018 (USD mn)...... 83

1 Introduction

This chapter serves as an introduction for the background of the thesis topic and the case company with the presentation of the research questions, investigative questions and key concepts discussed.

1.1 Background of the thesis topic

2014 saw the collapse of oil prices due to surplus of oil, new production methods and lower demand leading to oil producing companies losing equity and drying profits. The OPEC deals agreeing to cut production brought short term results to the price of oil but its effectiveness in the long term is questionable. The changing global environment with the rise of sustainable technologies forces oil companies to rethink their strategies and imple- ment new measures to offset the effects of oil price fluctuations. Analyzing the financial ratios of companies gives a holistic picture on the company’s performance, profitability and future strategy.

The reason I choose this topic is to learn more about companies’ financial performances in an everchanging business environment through financial analysis. It is essential to ob- tain sound qualitative and quantitative information to understand a company’s position.

In this thesis I will analyze Mol Group a Hungarian multinational oil and gas company’s key financial ratios and analyze its performance compared between 2014-2018 and to its largest local competitor OMV. Mol Group has implemented new strategies to diversify their core business and reduce reliance on oil income as outlined in their 2030 strategy plan. The purpose is to find out how the changes in oil prices have affected the company’s financial performance between 2014 and 2018.

1.2 Research Question

The thesis aims to analyze Mol group’s financial performance resulting from the falling oil prices regarding key financial ratios. The research question was divided into the following investigative questions:

1. How has Mol Group’s financial performance developed between 2014 and 2018?

2. How has oil price fluctuations affected Mol Groups’ financial performance between 2014-2018?

3. How has Mol Group’s financial ratios developed between 2014-2018 benchmarked to its local competitor OMV regarding the price volatility of oil?

4. How effective was Mol Group in combating the negative effects of oil price volatility?

Table 1. Overlay matrix Investigative Theoretical Research methods Outcome questions framework IQ 1 Financial perfor- Desktop study / Comparing between years mance analysis Comparative Study to oil price changes IQ 2 Financial state- Desktop Study / Comparing between years ment analysis Comparative Study to oil price changes IQ 3 Financial ratio Desktop Study / Comparing between years analysis Benchmarking / to key competitor and oil Comparative Study prices changes IQ 4 Financial perfor- Desktop study / Financial performance mance analysis Comparative Study evaluation

1.3 Demarcation

The thesis will focus on the effect of oil price fluctuations had on Mol Group financial performance and its financial ratios between 2014-2018 and compare them with a key local competitor OMV in the region. Financial performance will be evaluated based on analyses of financial statement and financial ratios. Financial Statement analysis includes vertical and horizontal analysis and financial analysis. The financial statements include the balance sheet, the group income statement and the cash flow statement, while financial ratios include profitability, liquidity, financial leverage and shareholder ratios. These will be analyzed to see if falling oil prices had any significant effect on the company’s financial performance and whether Mol Group managed to offset the price volatility of oil.

1.4 International Aspect

Mol group is a publicly listed company with international operations in over 40 countries worldwide. The fall in oil prices affected all oil companies globally but not equally, therefore financial analysis can determine which companies were able to offset the change in oil prices and become more resilient to the changing global environment.

1.5 Benefits

Since this thesis is a desktop research there is no beneficiary of a commissioned company but might provide benefits to other stakeholders of the company such as existing and potential investors of Mol group. Financial analysis provides a perspective of the financial, operational and strategic performance and management of the company. The research will benefit my professional career by learning about financial analysis and financial performance that are essential for making sound business decisions and investments in a company and is useful for the management and financial planning in a company.

1.6 Risks and Risk management

Risks could involve not obtaining enough information to interpret data or faulty interpreta- tion of data thus reaching wrong conclusions. Comparing and benchmarking competitors and years must be done based on the same data and ratios. Financial analysis presents risks when comparing financial ratios of companies that are presented in consolidated accounts therefore subsidiaries must be taken in account. When comparing companies, they may aggregate financial information differently, resulting in false conclusions about the results of the company in comparison. In order to limit these risks, the size of the competitor will be similar in the region and industry, using the same financial ratios with local currency converted to USD. Ratio analysis have limitations in financial performance as- sessment as different companies may use different accounting methods, and have different divisions operating in various business segments making comparisons more difficult.

1.7 Key concepts

Financial performance refers to analyzing a company’s financial statements to see how well it is using its assets or resources to generate sales revenues. (Investopedia 2019a).

Annual report is a primary source of data which publicly listed companies publish yearly, containing financial and operational information plus commentary about the company’s performance and financial statements for its shareholders (Investopedia 2019b)

Financial ratio: A financial ratio is a figure divided by another figure.

Ratio analysis involves a quantitative analysis of financial ratios acquired and calculated from a company’s financial statements in order to analyze and evaluate a company’s operating and financial performance. (Investopedia 2019c)

Profitability ratios are a set of ratios used to measure a company’s ability to generate profit from its assets, resources, costs and the investments made. (Investopedia 2019d)

Liquidity ratios are a set of ratios used for measuring whether a company can generate enough cash flow to finance its short-term liabilities. (Investopedia 2019e)

Leverage ratios are a set of ratios used for measuring whether a company can generate enough cash flow to pay for its long-term liabilities. (Investopedia 2019f)

Shareholder ratios are a set of ratios used to show the level of return a business is generating for its shareholders.

Financial statement analysis is used to assess and evaluate a company's financial statements to understand its financial results, supporting more effective decision making for both internal and external parties in an organization or business. (Investopedia 2019g)

Benchmarking involves financial analysis by comparing a company’s financial results or ratios with other companies in the same industry or to industry standards, performance numbers or a benchmark. (My accounting course 2019a)

1.8 Case Company

MOL Group is an integrated, international oil and gas company, headquartered in Buda- pest, Hungary. It is the largest Hungarian company and the second most valuable company in Central and Eastern Europe, active in over 30 countries with an international workforce of over 25,000 personnel and over 75 years of experience in exploration and production of oil and gas.

Business segments

MOL Group consists of five business segments: Upstream, Downstream, Consumer Ser- vices, Gas Midstream and Corporate and other segments. The terms upstream, midstream and downstream refer to the stages of production in an oil and gas producing company's supply chain. (Investopedia 2019h) Since MOL is an integrated oil and gas company it combines the functions of upstream, downstream, and midstream together.

Upstream

Upstream segment focuses on exploring, extracting and producing oil and gas. ” MOL Group has over 80 years of experience in exploration and production and its di- verse portfolio includes oil and gas presence in 13 countries, with production activity in 8 countries” (MOL Group 2019a.)

Downstream

Downstream segment engages in the post-production of crude oil and natural gas activities. “MOL Group’s Downstream division operates four refineries and two petrochemicals plants and is made up of different business activities that are part of an integrated value chain. This value chain turns crude oil into a range of refined products, which are moved and marketed for household, industrial and transport use.” (MOL Group 2019b.)

Gas midstream

The midstream sector involves the transportation, storage, and wholesale of natural gas

Consumer services

Consumer Services, a separate business segment from 2016, consists of “MOL Group’s retail network of close to 2,000 service stations in ten countries, predominantly located in the supply radius of the Group’s refineries which maximizes synergies between refining, marketing and retail.” (MOL Group 2019c.)

Corporate and other

Corporate and other segment provides maintenance, financing and other services to the rest of the business segments.

Oil companies that rely heavily on upstream operations involving exploration and production are hurt badly when oil prices fall due to selling oil based on market value, with high fixed cost of production. On the other hand, downstream companies profit margins are not affected to that extent by oil price fluctuations since they profit by purchasing crude oil at market value and sell it as refined products at a higher price on gas stations with addi- tional services.

Since MOL is integrated oil and gas company meaning it has both upstream and downstream operations, they are affected by oil price fluctuations, the larger the upstream operations the more negatively affected by falling oil prices while the larger the downstream operations the better to combat or even profit from fluctuating oil prices.

In the 2014 annual report Mol Group stated that

Looking ahead, having achieved the right balance between Upstream and Downstream will allow MOL to maintain and grow its profitability even at reduced oil prices. Although a low oil price is a challenge, it is equally an opportunity, as our increasingly integrated business model is well-positioned to take advantage of changes in the market, as the strength of our balance sheet will allow us to seek new attractive inorganic opportunities should opportunities arise. (MOL Annual report 2014a, 5.)

In October 2016 MOL Group released its 2030 strategy report highlighting key areas to focus on in a new and ever evolving business environment. The falling oil prices has affected many oil companies’ earnings and MOL is no exception, which resulted in the company diversifying its revenue streams by developing a new strategy with focus on increased investments in petrochemicals production and innovation in transportation services besides its core oil and gas exploration and production.

Crude oil price development

MOL’s financial performance is subject to the price volatility of oil, therefore it must man- age external risks associated with oil price fluctuations. It is important to look at the development of crude oil prices between 2014-2018 to compare it against the financial performance of MOL. Oil price has declined from the second half of 2014 bottoming in the beginning of 2016 and then increased from 2016 until the first half of 2018 when it again decreased in the second half of 2018. The reason for oil price fluctuations is based on supply and demand for oil with many forces being at play. OPEC can influence the price by cutting production, though its effectiveness has been diminishing as the USA became the number one producer of oil due to new ways of shale oil extractions. It is more difficult to predict oil price movements as supply and demand are becoming more and more effected by many external factors not just economical but geopolitical, environmental and techno- logical factors as well. The price and movement of crude oil should indicate the profitability and financial performance of MOL between 2014-2018 with some key financial ratios being directly affected by it. The figure below presents the graph of crude oil prices between 2014-2018 in USD/barrel to which results, and ratios will be compared, to look for trends.

Crude oil prices Brent Europe (USD/barrel) 140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018

Figure 1. Crude oil price development in USD/barrel

2 Financial Performance Analysis regarding financial ratios and benchmarking

In this chapter the theoretical framework will be discussed regarding to key theoretical concepts. Financial performance analysis involves financial statement analysis as a basis of performance analysis combined with financial ratio analysis to benchmark the calculated ratios against industry averages or competitors in the same industry.

2.1 Financial statements analysis

Financial statement analysis serves as a basis for the financial performance analysis of the company over a period, essential for understanding key financial and performance in- dicators of the company. The purpose of financial statement analysis is to evaluate the past, present, and future performance of a company allowing various investment, credit, managerial and other business decisions. (Robinson & Elaine 2015)

The most commonly used methods for financial statement analysis include trend analysis, ratio analysis and common‐size statements. The results calculated are then compared to historical company data, competitors, or industry averages. Financial statements analysis of MOL Group between years and to its key local competitor will provide information about the company’s performance over time and its financial strengths and weaknesses.

2.2 Vertical & Horizontal analysis

Another method used for analyzing financial statements are horizontal and vertical analysis. Horizontal analysis or trend analysis is the comparison of financial statement items in a company’s financial statements over a period. Vertical or common-size analysis on the other hand means proportionally analyzing financial statements, where each item on a financial statement is measured as a percentage of another item. (Accounting tools 2019a.)

Vertical analysis or common size analysis is performed by expressing financial results, or the whole financial statements, in relation to a single financial statement item, or base. Items used most frequently as the bases are total revenue and total assets. Common-size or vertical analysis creates a ratio between every financial statement item and the base item thus revealing the relationship between each item. (Robinson & Elaine 2015)

Horizontal or trend analysis provides financial information about the company regarding its financial performance and growth over time which can be useful for planning and forecast- ing financial results for management and investors. (Robinson & Elaine 2015)

2.3 Financial ratio analysis

A method for analyzing financial statements is the use of financial ratios and financial ratio analysis. Financial ratios are calculated through the relative size of one number in relation to another. Financial ratios analysis is a comparison of financial ratios during a period, between industry averages or to other company’s financial ratios. Relations between financial ratios helps to understand financial strengths and weaknesses of the company. (My accounting course 2019b.)

Financial ratios can be used to compare different companies in similar industries, while in this case comparing MOL Group to its key local competitor OMV between 2014-2018. There are many categories of ratios, which can be analyzed and compared to examine the different aspects of a company's performance. In my analysis I will be analyzing and comparing liquidity ratios, leverage ratios, profitability ratios and shareholder ratios between years and to MOL Group’s key local competitor OMV to see how it has performed over time regarding the price volatility of oil. Strengths and weaknesses will be analyzed to evaluate which company performed better over time in its respective financial ratios and assess to what extent oil price fluctuations were affecting their performances.

2.4 Financial Benchmarking

Financial benchmarking is done in order to evaluate the company’s financial performance and position by performing a financial analysis and comparing the results to different time periods, industry standards or to competitors in the same industry. The purpose of benchmarking financial ratios is to assess the financial performance and position of a company in relation to another in the same industry, or to industry averages in order to identify trends and areas for improvements in its financial performance. (tutor2u 2019a) Mol Groups’ financial ratios will be compared between 2014 and 2018 to its largest local competitor to see if there is an underlying trend in its performance regarding the price fluctuations of oil.

Benchmark

Financial ratio analysis

Financial Statement analysis

(Vertical and Horizontal analysis)

Figure 2. Picture of the theoretical framework

3. Research methods

The thesis approach is going to be a desktop study of empirical research with a combina- tion of a comparative research approach. Because the data for the analysis is available from annual reports online, the data collection and research are secondary in nature. I will use a comparative approach in analyzing and comparing the effects of oil prices had on the financial ratios of MOL Group, based on financial statement and ratio analysis.

Quantitative approach is more relevant than qualitative in this research as the study will compare quantitative data using secondary analysis. Benchmarking financial ratios between years and to local competitor will be done as part of the comparative research.

RQ + IQs

Secondary Comparative Research

Phase1 Phase 2 Phase 3 Data collection & Calculations Analysis & Benchmarking Conclusion

Company’s annual reports, Financial Statement analysis, Interpreting results, quarterly reports, journas Horizontal and Vertical measuring outcomes (IQ 1, 2)

Financial Ratio calculations Financial Ratio analysis, Checking validity, from Financial Statements Measuring & Interpreting ratios reliability (IQ 1)

Comparing similarity & Benchmarking ratios differences (IQ 2, 3)

Analyzing data Interpreting comparisons Interpretations of results Discussions of outcomes

(IQ 4) Generalizing results

Figure 3. Visualization of research process

As this research is a desktop study, information will be obtained from secondary sources such as the company’s official annual reports and relevant sources like business articles, journals and company statements. Official sources such as company’s annual reports,

earnings reports and official data present valid information for the research to be carried out.

The research process involves three phases centered around the comparative and empirical research. The first phase involves theory and data collection using the company’s official annual reports, business news articles and journals. From the data obtained horizontal and vertical analysis of balance sheet and income statement are measured for financial statement analysis and financial ratios are calculated for financial ratio analysis. In phase two financial statement analysis and financial ratio analysis with benchmarking of the data collected and calculated will be made as part of a financial performance analysis. Finan- cial ratios will be compared with the local competitor OMV between different years to see if there is an underlying trend regarding the effects of oil prices had on the company’s profitability, liquidity, leverage and shareholder ratios. After comparing the ratios and analyzing the data I will generalize the results. Finally, in phase three I will make a discussion and conclusion based on the analysis of the results and outline the main points.

4. Financial Performance analysis

In this chapter financial performance analysis will be carried out by looking at the developments of financial results at MOL by each business segment during 2014-2018 and measure how oil price fluctuations have impacted them between this period. The key financial metrics that will be analyzed includes net sales revenues, operating profit, EBITDA, net income, working capital, capital expenditure, operating cash flow and free cash flow.

4.1 Net sales revenues

Net sales or total revenues equals to the company’s total income or gross sales minus sales returns, sales allowances and sales discounts deducted. It is the top item on the income statement showing how much sales the company generates in over a period. (In- vestopedia 2019i) Each business segment at MOL will be analyzed to see how oil price fluctuations affected them individually and the company between 2014-2018.

Total net sales revenues (USD mn) 30,000 26,127 25,000 22,877 20,887 20,117 19,054 20,000 15,993 16,722 14,650 15,114 15,000 12,624

10,000

5,000

0 2014 2015 2016 2017 2018

TOTAL Net sales revenues TOTAL Net external sales revenues

Figure 4. Total net sales revenues

It is important to distinguish between total net sales revenues and total external sales revenues. When looking at revenues by each segment, total net sales revenues are used as it “includes results of fully consolidated subsidiaries engaged in their respective segments.” (MOL Group Annual report 2014b, 79.) However, when analyzing the company’s financial results total net external sales revenues will be used, as this gives the holistic picture of sales to external parties, excluding internal sales to subsidiaries.

Total net external sales revenues (USD mn) 25,000 20,887 20,000 19,054

14,650 15,114 15,000 12,624

10,000

5,000

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Figure 5. Total net external sales revenues

Net external sales revenues have decreased as oil prices decreased between 2014-2016 and increased as oil prices also increased between 2016-2018. Net external sales revenues were highest in 2014 when oil prices were higher, and lowest in 2016 when oil prices hit the lowest levels. As oil prices increased in 2018 net external sales revenues came close to 2014 levels before oil prices started to decline. 12

Total net external sales revenues growth 40% 30% 26% 20% 20% 10% 0% -10% 2014 2015 2016 2017 2018 -20% -14% -30% -30% -40% -50% -60% -57% -70%

Figure 6. Total net external sales revenues growth

It’s clear that the effect of oil price fluctuations indicates the volatility of net external sales revenue of MOL between 2014-2018. In 2014 net external sales decreased by 57% compared to 2013 and was 20,887mn USD while in 2015 a 30% decrease to 14,650mn USD shows the effect of oil price decline had on net sales revenues. In 2016 oil prices fell even lower and so did net external sales revenues at MOL with a further decrease of 14% to 12,624mn USD. In 2017 an upward trend is visible as oil prices started to increase so did net external sales revenues climbed with 20% to 15,114mn USD in 2017 and a 26% increase in 2018 to 19,054mn USD.

Net Sales revenues by segment (USD mn) 30,000 933 25,000 931 5,892 458 793 20,000 356 735 668 4,132 15,000 371 3,556 359 18,999 317 10,000 16,935 13,425 13,333 10,863 5,000

2,489 2,011 0 1,462 1,318 1,501 2014 2015 2016 2017 2018

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 7. Net Sales revenues by segment

Looking at net sales revenues by segment it’s clear that both downstream and upstream revenues have been affected by oil price fluctuations. As oil prices decreased from 2014- 2016 so did revenues from downstream and upstream and as it increased from 2016- 2018 so did upstream and downstream revenues increased. From 2016 MOL introduced consumer services as a separate business segment which revenues has increased every yeah between 2016-2018. This shows MOLs strategy to diversify its business segments and not rely solely on oil revenues due its price fluctuations being unpredictable and move towards new revenue segments. Gas midstream and corporate and other segment has also decreased during 2014-2016 and increased between 2016-2018 to some extent therefore they were also affected by oil price change.

Net sales revenue growth by segment 60% 43% 40% 34% 27% 23% 16%19% 18% 20% 14% 13% 4% 0% -1% -8% -20% -10% -9% -12% -19% -21% -19% -40% -29% -15% -41% -60%

-80% -73% Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 8. Net sales revenue growth by segment

Looking at the growth of net sales revenue by segment it is evident that oil price fluctuations affected all business segments. When oil prices decreased between 2014-2016 all segments decreased except corporate and other segment which increased by 4% in 2014. The most substantial decrease by each business segment was in 2015 when oil prices declined the sharpest causing Upstream to decrease by 41% and Downstream to decrease by 29%. As oil prices started to increase in 2017 until 2018 so did all business segments turned growth. Surprisingly consumer service growth was the largest in 2018 with 43% growth, while in 2017 it grew by only 16%. Upstream has decreased the most in 2015 by 41% due to low oil prices effecting it the most, while downstream decreased by 29%. Gas midstream have also decreased during low oil prices, with a significant decrease in 2014 by 73% when oil prices started to decline.

Share of net sales by segment 120%

4% 5% 100% 4% 4% 4% 2% 2% 21% 21% 23% 80% 2% 2% 1%

60% 83% 84% 40% 65% 66% 65%

20%

11% 9% 8% 7% 8% 0% 2014 2015 2016 2017 2018

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 9. Net sales revenue share by segment

Looking at the share of net sale by segment, it’s clear that share of downstream revenue has decreased from 2014-2015 from 83-84% to 65-66%, mainly due lower oil prices and consumer services being introduced in 2016 taking up 21-23% share of total revenues between 2016-2018. The share of upstream has also decreased from 11% in 2014 to 9% in 2015 as a result of oil price decline and it has stayed at around 7-8% between 2016-2018. Gas midstream stayed at 2% between 2014-2017 and dropped to 1% in 2018. Corporate and other sales stayed at 4-5% between 2014-2018.

4.2 Operating profit/loss (EBIT)

EBIT stands for earnings before interest and taxes or in other words operating profit or operating income, represents a company’s operating profitability, calculated by subtracting expenses from sales revenues ignoring tax and interest. Operating profit shows a company’s operating efficiency and profitability from is core business segments. Operating profit is an important measure as it can be controlled by managers through cutting or increasing operating expenses. Each business segment will be analyzed to see how oil price fluctuations have affected them individually and the company between 2014-2018.

Total operating profit (USD mn) 1,500 1,278 1,334 1,099 1,000

500 223

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(500)

(738) (1,000)

Figure 10. Total operating profit

Operating profit was 223mn USD in 2014 as oil prices declined and decreased even further in 2015 to negative -738mn USD in 2015 when oil prices decreased further as well. Operating profit increased and turned positive 1099mn in 2016 due to lower operating expenses as a result of low oil prices and increased every year from 2016 until 2018 as oil prices started to increase so did net sales revenues increased resulting in operating profit increasing steadily every year as well, while operating expenses not increasing by much.

Total Operating Profit growth 500% 369% 400% 300% 249% 200% 100% 16% 4% 0% -100% 2014 2015 2016 2017 2018 -200% -300% -400% -500% -431%

Figure 11. Total operating profit growth

Total operating profit have increased in 2014 by 369% and decreased by 431% in 2015 as a result of oil price decline. In 2016 operating profit has increased by 249% as a result of operating expense reduction and much better results from upstream division than in 2015 with the introduction of new upstream program which “aims for making the business self- funding at USD 35/bbl. oil price”. (MOL Group Annual report 2015, 9.) In 2017 and 2018 operating profit growth was modest with 16% and 4% as oil prices increased and stabilized. 16

Operating profit by segments (USD mn) 2,000

1,500 266 322 190 175 138 1,000 164 147 596 881 820 500 195 944 532 354 264 0 132 (113) (238) (221) (255) (500) (184) (1,643) (1,000)

(1,500) (239) (2,000)

(2,500)

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 12. Operating profit by segments

In 2014 Upstream delivered an operating profit of 354mn USD, while Downstream generated a loss of 113mn USD in operating profit due to higher oil prices effecting positively upstream while less so downstream. In 2015 when oil prices sharply declined Upstream operation was hurt badly resulting in -1643mn USD in operating loss, while downstream benefited from the lower oil price generating 944mn USD in profit. As oil prices started to increase so did operating profit from Upstream increased, while operating profit from Downstream started to decrease between 2016-2018. Gas midstream has been profitable between 2014-2018 every year, and so was consumer services between 2016-2018. Cor- porate and other segment has been unprofitable every year between 2014-2018.

Operating profit growth by segment 1200% 936% 1000% 800% 600% 400% 85% 108% 100% 40% 101% 200% 28% 34% 7% 19% 21% 0% -200% -44% -16% -30% -7%-10% -7% -7% -27% -7% -400% -21% -600% -800% -564%

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 13. Operating profit growth by segment

Looking at the operating profit growth by segments it’s clear that in 2015 when oil prices sharply declined downstream operations grew by a staggering 936%, while upstream decreased by 564%. Upstream was able to bounce back and increase every year by around 100% between 2016-2018 due to increasing oil prices and operating cost reduction. Downstream has decreased every year between 2016-2018 as oil prices increased. Con- sumer services managed to grow every year since its inception from 2016 with a 40% growth in 2017 and a 21% growth in 2018. Gas midstream has grown in 2014 and 2017 and decreased in 2015,2016 and 2018. Corporate and other services decreased in 2015, 2017 and 2018 and increased in 2014 and 2016.

Operaing profit share by segment 100%

80% 17% 21% 24% 13% 14% 10% 60% 87% 45% 40% 22% 80% 64% 20% 159% 128% 40% 21% 0% 12% -51% -20% -19% -19% -20% -83% -223% -40%

-60% -32%

-80%

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 14. Operating profit share by segment

Upstream segment has been the major contributor of operating profit in 2014 prior to oil price decline, surpassing total operating profit with a 159% share of total operating profit, while downstream resulted in a loss generated a -51% share of total operating profit, therefore when oil prices are high upstream is highly profitable while downstream is unprofitable. As oil prices started to decline in the second half of 2014 and remained low in 2015, a shift happened with downstream becoming profitable and surpassing total operating profit as its share rose to 128%, while downstream declined and generated a loss at - 223% share of total operating profit. As oil prices started to increase the share of operating profit from downstream started to decline as well between 2016-2018, while at the same time the share of upstream started to increase every year. The share of consumer services has been increasing every year from 2016 until 2018 generating higher shares of total operating profit each year from 17% in 2016 to 24% in 2018. The share of operating

profit from gas midstream was high in 2014 when oil prices were higher with 87% but has since declined every year from 2015 due to MOL merging its gas subsidiaries to upstream division. Corporate and other division has been unprofitable every year between 2014- 2018, in 2014 having -83% share of total operating profit and has been decreasing in 2015 to -32% and staying at 19-20% between 2016-2018.

4.3 EBITDA

Earnings before interest, taxes, depreciation and amortization, or operating profit plus depreciation and amortization or in short EBITDA is used to analyze and compare profitability and efficiency among companies in the same or different industries. It shows how well a company generates profits from its operations by ignoring the effects of financing and capital expenditures and not taking into consideration variables like cost of financing, ag- ing assets, and taxes. EBITDA is a good indicator of operating cash flow but a poor measure of free cash flow as it does not consider many expenses. Each business segment will be analyzed to see how oil price fluctuations have affected them individually and the company between 2014-2018.

EBITDA (USD mn) 3,000 2,820

2,443 2,500 2,297 2,217

2,000 1,630 1,500

1,000

500

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Figure 15. Total EBITDA

In 2014 EBITDA was low due to the start of oil price decline but managed to stay positive even during low oil prices between 2014-2016 and increased every year except in 2016, due to low capital expenditures and operating expenses having positive effect on operating cash flow.

EBITDA by segments (USD mn) 3,500

3,000 423

2,500 358 189 214 307 223 2,000 194 253 1,082 1,343 1,500 428 1,184 1,238 1,000

1,235 1,314 500 855 844 652 0 (98) (133) (137) (149) (154) 2014 2015 2016 2017 2018 (500)

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 16. EBITDA by segments

The Upstream segment’s EBITDA was 1235mn USD in 2014, and 855mn USD in 2015 which is 380mn USD lower compared to 2014, due to the decrease in oil prices. The Up- stream segment’s EBITDA was 652mn USD in 2016, which is 203mn USD lower than in 2015 due to lower oil prices. As oil prices started to increase in 2016 so did the EBITDA of upstream started increasing between 2016-2018 with 844mn USD in 2017 and 1314mn USD in 2018. Downstream segments EBITDA was only 428mn USD in 2014 due to high oil prices favoring Upstream but has increased to 1343mn USD in 2015 due to oil prices declining sharply.

Downstream segments EBITDA continued to contribute strong results but has started to decrease every year due to oil price slowly increasing, even though in 2018” Downstream business contributed almost USD 1bn EBITDA despite less favorable macro environment, as MOL delivered more than USD 100mn internal efficiency improvement” (MOL Group Annual report 2018a, 4.)

Gas midstream performed well in low oil price environment between 2014-2018, while Corporate and other segment creased a loss of EBITDA every year. Consumer services sector generated better results every year between 2016-2018 with 307mn USD in 2016, 358mn USD in 2017 and 423mn USD in 2018.

EBITDA growth by segments 250% 214%

200%

150%

100%

56% 48% 50% 29% 17% 15% 18% 1% 0% -12% -8% -3% -4% -3% -16% -9% -9%-15% -25% -24% -9% -50% -31% -35%

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 17. EBITDA growth by segments

In 2014 Upstream segments EBITDA decreased by 25% due to lower oil prices, as well as downstream by 12%. In 2015 downstream shows a 214% increase in EBITDA due to lower oil prices while Upstream decreased further by 31%. In 2016 Downstream EBITDA decreased slightly by 8%, while Upstream decreased further by 24% due to lower oil prices than previous year. In 2017 Upstream has increased as oil prices started to increase, while Downstream decreased by 4% only due to efficiency measures implemented the previous year. In 2018 Upstream increased by 56% due to even higher oil prices, while Downstream only decreasing by 9% due to efficiency improvements.

Gas midstream has decreased every year except in 2014 and 2017, while Corporate and other segment only increased in 2014 by 48% but decreased every other year. Consumer services managed to increase its EBITDA every year between 2016-2018 with 17 % in 2017 and 18% in 2018.

During lower oil prices between 2014-2016 Upstream segment’s growth in EBITDA decreased, while between 2017-2018 Downstream saw its EBITDA growth decrease. This shows how the integrated business model at Mol reacts to the price volatility of oil, when oil prices are lower Downstream performs better, and when oil prices increase Upstream is showing greater financial performance in EBITDA level.

EBITDA share by segment 120%

100% 14% 9% 14% 15% 15% 9% 9% 7% 80% 24%

58% 38% 60% 56% 48%

40% 70% 46% 20% 37% 29% 35%

0% -6% -6% -6% -6% -5% 2014 2015 2016 2017 2018 -20%

Upstream Downstream Gas Midstream Consumer Services Corporate and Other

Figure 18. EBITDA share by segment

In 2014 during higher oil prices Upstream contributed 70% of total EBITDA, while downstream contributing only 24%. As oil prices declined in 2015 and 2016 Downstream contributed more than half of total EBITDA, while Upstream’s EBITDA contribution decreased from 70% in 2014 to 29% in 2016 when oil prices bottomed. As oil prices increased between in 2017 and 2018, so did the share of Upstream’s EBITDA started to increase, while Down- stream’s share started to decline. Gas midstream made up 14% of total EBITDA in 2014 and has since decreased to 7% in 2018. Corporate and other segment contributed negatively every year, while Consumer service increased its share of EBITDA from 14% in 2016 to 15% in 2017 and 2018.

4.4 Net Income

Net income or net profit is a company’s bottom line calculated by subtracting cost of goods sold, expenses and taxes from net sales revenue during an accounting period. It shows how much profit a company made after all expenses are subtracted from its total revenues. Net income is a company’s bottom line as it shows how much profit the company generated in a fiscal year after all expenses have been considered. MOL Group’s net income will be analyzed to see if oil price fluctuations have affected its development between 2014-2018.

Net Income (USD mn) 1,500 1,147 1,128 1,000 900

500

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 (218) (500)

(1,000)

(1,141) (1,500)

Figure 19. Total Net Income

Net income shows a similar trend to operating profit, except in 2014 it was negative 218mn USD and not positive as compared to operating profit. In 2015 net income decreased by 423% to negative 1141mn USD as oil prices declined but has increased and stabilized between 2016-2018 as oil prices started to increase as well reaching 900mn USD in 2016, 1147mn USD in 2017 and 1128mn USD in 2018.

Net income growth 300% 179% 200%

100% 27% 0% 2014 2015 2016 2017 2018 -100% -2%

-200% -176%

-300%

-400% -423% -500%

Figure 20. Net income growth

Looking at net income growth it’s clear that as oil prices declined net income has declined as well in 2014 and 2015. In 2016 Net income increased by 179% due to reduction in operating expenses and increase in operating profit. Growth in in 2017 was 27%, while in 2018 net income has decreased by 2% as oil prices declined in the second half of 2018.

4.5 Working capital

Working capital is defined as current assets minus current liabilities which shows the operating liquidity of a business thus giving a picture of its short-term financial position. If working capital is positive it means that the company has enough liquid assets to finance its day to day operational expenses, while if its negative it means that the company has more current liabilities than current assets and can not finance its shot term debts and payables.

Working capital (USD mn) $800 $720 $658 $600

$400

$200

$- FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 $(200) $(225) $(400) $(447) $(600) $(501)

Figure 21. Total Working capital

Working capital has been negative during low oil prices between 2014-2016 and turned positive when oil prices were higher between 2017-2018. Oil price decline had negative effect on working capital between 2014-2016 as current liabilities outweighed current assets causing negative working capital.

Working capital growth 250% 231%

200%

150%

100% 50% 50% 9% 0% 2014 2015 2016 2017 2018 -50%

-100%

-150% -126% -123%

Figure 22. Working capital growth 24

Working capital decreased by 126% in 2014 and by 123% in 2016 due to current liabilities growth outpacing current assets growth. Working capital increased in 2015 by 50% as total liabilities decreased more than total current assets. From 2017 working capital grew by 231% as oil prices increased total current assets have increase also like cash, inventories and trade receivables. In 2018 working capital growth was 9% as oil prices have decreased in the second half of 2018.

4.6 Capital expenditure

Capital expenditure is the capital a company spends to purchase, maintain or improve its fixed assets, like property plant and equipment. Capital expenses are used to finance long term expenses, while operating expenses are used up during an accounting year.

Capital expenditure by segments (USD mn) 2,500 80 16 121 2,000

667 80 1,500 20 151 265 57 81 34 26 1,000 199 373 220 18 148 1,412 390 617 500 478 800 435 320 312 0 2014 2015 2016 2017 2018

Upstream Downstream Consumer Services Gas Midstream Corporate and Other

Figure 23. Capital expenditure by segments

The oil price decline greatly affected capital expenditure at MOL across all segments between 2014 - 2018. The most significant decrease was in 2015 when capital expenditure decreased by 33% as oil prices started to decline in 2014. The following year capital expenditure decreased by 27% in 2016 and by 7% in 2017. As oil prices started to increase between 2017-2018, capital expenditure increased as well by 26%. Upstream’s capital expenditure decreased from 1412mn USD in 2014 to 312mn USD in 2018, while Down- stream’s capital expenditure decreased from 667mn USD in 2014 to 390mn USD in 2016

but has increased its capital expenditure between 2016-2018 surpassing Upstream between 2017 and 2018 more each year. Consumer services capital expenditure is the lowest of all business segments, followed by corporate and gas midstream.

Capital expenditure growth by segment 140% 119% 120% 111% 101% 100% 87% 88% 80% 60% 40% 35% 33% 31% 29% 40% 27% 23% 20% 0% 4% 0% -20% -3% -2% -17% -40% -26% -28% -33% -60% -43%-44% -46% -31% -56% -80%

Upstream Downstream Consumer Services Gas Midstream Corporate and Other

Figure 24. Capital expenditure growth by segment

It’s clear to see the strategy at MOL by looking at the capital expenditure prior to oil price decline and post oil price decline. In 2014 both Upstream and Downstream saw an over 100% increase in capital expenditure with consumer services increased at 33%. As oil prices declined in 2015 both Upstream and Downstream saw a fall in capital expenditure by over 40% while consumer services increased by over 100%. Capital expenditure in Up- stream segment continued to decrease between 2016-2018, though less every year as oil prices started to increase. At the same time capital expenditure in Downstream segment started to increase more every year between 2016-2018 as oil prices started to increase. The higher the oil prices the higher the Downstream contribution in capital expenditure, while the lower in Upstream and vice versa between 2016-2018. In 2018 the focus of capital expenditure was on consumer services and corporate and other segments. Gas midstream saw capital expenditure increase between 2015-2016 during lower oil prices.

Capital expenditure shows the strategy at MOL Group with increasing capital expenditure in Downstream from 2016 until 2018 and decreasing spending on Upstream during the same period. As oil prices declined in 2014 capital expenses decreased greatly and only increased in 2018 when oil prices started to increase higher. Upstream expenditure dropped every year since oil price declined in 2014 showing a clear strategy of focus on other business segments instead.

Capital expenditure share by segment 120%

100% 3% 5% 5% 1% 1% 8% 12% 5% 2% 2% 17% 3% 80% 19% 14% 29% 15%

24% 60% 35% 46% 47% 40% 62% 52% 20% 39% 31% 24%

0% 2014 2015 2016 2017 2018

Upstream Downstream Consumer Services Gas Midstream Corporate and Other

Figure 25. Capital expenditure share by segment

Looking at the share of capital expenditure by segments its clear to notice that Upstream sector saw a decreasing capital expenditure every year ever since oil prices decreased in 2014, while Upstream saw an increasing share of capital expenditure year after year from 2015 until 2018. This clear focus on Downstream is even presented by MOL winning the “Downstream Business of the Year” award in 2016. As oil exploration becomes more costly and uncertain with the fluctuating oil prices the Upstream division saw diminishing capital expenditures with the consideration of selling off the North Sea assets bought prior to the oil price decline in 2014 when prices were expected to be much higher according to various sources. The share of consumer service’s capital expenditure has been highest during low oil prices in 2015 and 2016, while corporate and other segment saw its share of total capital expenditure increase every year due to it being unprofitable every year between 2014-2018. Gas midstream has had the lowest share of capital expenditure with around 1-3% of total.

4.7 Operating Cash flow

Operating cash flow measures how much cash is generated by a company's core business operations, excluding costs associated with long-term investment on capital items. Operating cash flow tells whether a company can generate enough positive cash flow to support and expand its business operations or if it needs external sources of financing. (Investopedia 2019j)

Operating cash flow was positive even during lower prices due to MOL operating as a low- cost producer across several regions so that most of the production was cash flow positive despite lower oil prices. Another reason for strong operating cash flow is due to cuts in capital expenditures from 2015 until 2018, while at the same time high EBITDA from Downstream segment during the same time. In 2016 operating cash flow has decreased as EBITDA have decreased as well. Consumer services sector has increased its EBITDA contribution from 2016 thus resulting in higher operating cash flow.

Operating cash flow (USD mn) 2,500 2,189 2,088 2,070 1,843 2,000 1,720

1,500

1,000

500

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Figure 26. Total Operating cash flow

In 2014 operating cash flow amounted to 1720mn USD, “which also reflected higher cash outflows in the working capital lines.” (MOL Group annual report 2014c, 55.)

In 2015 operating cash flow increased to 2088mn USD due to “some negative changes in net working capital (primarily on lower payables), thus net cash provided by operating activities amounted increasing year-on-year.” (MOL Group annual report 2015a 33.)

In 2016 operating cash flow decreased to 1843mn USD, “in line with the fall in underlying EBITDA. Changes in net working capital were like last years, thus net cash provided by operating activities also came in lower at 1843mn USD.” (MOL Group annual report 2016a, 35.)

“Accounting for the increase in net working capital, reflecting the higher oil price environment, operating cash flow saw an increase in 2017 to 2070mn USD, in line with the increase in underlying EBITDA.” (MOL Group annual report 2017a, 35.)

” Accounting for increase in net working capital, reflecting the higher oil price environment, operating cash flow increased in 2018 to 2189mn USD in line with the increase in underlying EBITDA.” (MOL Group annual report 2018b, 12.)

Operating Cashflow growth 30% 21% 20% 12% 10% 6%

0% 2014 2015 2016 2017 2018 -10% -12% -20%

-30%

-40% -33%

Figure 27. Operating cash flow growth

Operating cashflow decreased in 2014 by 33% due to low EBITDA as a result oil price decline decreasing cash generation from Upstream segment. In 2015 operating cash flow grew by 21% in 2015 due to higher EBITDA as low oil prices generated high cash flow from the Downstream division. In 2016 operating cash flow decreased by 12% as oil prices remained low but Downstream and Upstream the two main EBITDA contributors performed worse than in 2015. In 2017 and 2018 operating cash flow increased as EBITDA increased also.

4.8 Free Cash flow

Free cash flow is a measure of financial performance measured by operating cash flow minus capital expenditures and dividends outflow. Its shows cash inflow and outflow.

Free cash flow (USD mn)

2500 2233

2000

1500 1377

1000 784 784 739 739 757 757 460 460 500

0 2014 2015 2016 2017 2018

Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Figure 28. Free cashflow

The oil price decline shows a clear effect on the development of free cash flow. In the beginning of 2014 cash was 2233mn USD while at the end of the year it decreased to 784mn USD as oil prices decreased. In 2015 cash decreased even further from 784mn USD in the beginning of the year to 460mn USD at the end of the year as oil prices declined further. From 2016 to 2018 free cash flow has increased year after year as oil prices increased also but was not able to reach the level of the beginning of 2014.

Free Cashflow growth 100% 82% 80% 61% 60% 40% 20% 2% 0% -20% 2014 2015 2016 2017 2018 -40% -41% -60% -80% -65%

Figure 29. Free cash flow growth

In 2014 a 65% decrease of 1450mn USD in cash and cash equivalents clearly show the effect of oil price decline had on MOL. In 2015 as oil prices fell more free cash flow decreased by 41% of 324mn USD as well. From 2016 to 2018 free cash flow has increased as oil prices started to increase and saw a spike in 2016 with a 61% increase of 279mn USD and in 2018 with an 82% increase generating 620mn USD as oil prices increased steadily. In 2017 free cash flow grew by only 2% as oil prices has not increased significantly in 2017.

In conclusion, the price volatility of oil greatly affected net sales revenues, net profit, working capital, capital expenditure and free cash flow of MOL between 2014-2018 as oil prices decreased these accounts decreased as well between 2014-2015. EBITDA and operating cash flow were not impacted to that extent as it excludes many expenses

5. Financial Statement Analysis

In this chapter horizontal and vertical financial statement analysis will be presented by looking at the developments of income statement and balance sheet items and checking how oil price fluctuations affected them between 2014-2018 to see if here is a trend.

5.1 Horizontal analysis

Horizontal or trend analysis of the income statement is looked at to see if there are trends over time by computing percentage increases or decreases of income statement items relative to the previous year. The percentages will be compared to changes in oil prices between 2014-2018 to see to what extent it affected various accounts and look for a trend. 5.1.1 Horizontal analysis of Income Statement

Table 2. Consolidated Income Statement of MOL Group in USD mn 2014-2018 Income statement (USD mn) 2014 2015 2016 2017 2018 Net sales 20,887 14,650 12,624 15,114 19,054 Other operating income 114 301 90 93 149 Total operating revenues 21,001 14,951 12,714 15,207 19,203 Raw material and consumables used 16,784 10,869 9,139 11,271 14,904 Personnel expenses 1,117 953 852 936 1,000 Depreciation, depletion, amortization 1,581 3,035 1,118 1,166 1,514 and impairment Change in inventory of finished 316 145 (118) (96) (208) goods & work in progress Work performed by the enterprise (207) (203) (159) (215) (255) and capitalized Other operating expenses 1,239 890 783 869 943 Total operating expenses 20,829 15,689 11,615 13,932 17,897 Operating profit 172 (738) 1,099 1,278 1,305 Interest income 46 28 12 15 22 Dividend income 18 19 22 25 26 Foreign exchange gains 3 251 137 176 289 Other finance income 85 23 4 11 18 Total financial income 152 321 175 227 355 Interest expense 182 142 126 89 79 Foreign exchange losses 138 407 139 115 354 Interest on provisions 46 37 31 25 38 Other financial expenses 234 66 55 23 18 Total financial expense 600 652 351 252 489 Financial (expense) / gain, net (448) (331) (176) (25) (134) Income from associates 81 8 51 69 55 Profit / (loss) before tax (195) (1,061) 974 1,322 1,226 Income tax expense 23 80 74 175 98 Net Income (218) (1,141) 900 1,147 1,128

Looking at the development of each income statement item horizontally gives a picture about the trends oil price fluctuations had influenced them between 2014-2018. The most relevant was the effect of the declining oil price had on total operating revenues, operating profit and net income which has decreased between 2014-2016 as oil prices have declined and increased from 2016 to 2018 as oil prices increased during the same period.

Operating revenues and profit growth

400% 322% 300% 249% 179% 200% 100% 20%16%27% 26%2% 0% -100% -8% -29% -15% -2% -200% -176% -300% -400% -500% -423% -600% -529%

Total operating revenues Operating Profit Net Income

Figure 30. Operating revenues and profit growth

From the horizontal analysis of the income statement it is evident that the fall in oil prices had a clear negative impact on the growth of operating revenues in 2014 with a decline of 8% and an even larger decrease of 29 % in 2015 and 15 % in 2016 respectively. Operat- ing revenues were only able to recover and bounce back from 2017 with a 20% increase when oil prices started an upward trend and climbed significantly until the end 2018 reaching above 80 dollars a barrel.

Net income for the period decreased dramatically in 2014 at 176% even though operating profit was positive and increased by a staggering 322% due to lower depreciation costs. Operating profit grew because raw material costs and depreciation costs decreased, and profit fell because total financial expenses outweighed total financial income in 2014 as it increased by 64% and financial gain decreased by 84%.

Operating profits declined drasticly by 529% in 2015 and profits declined even furhter to - 423% compared to previous year as oil prices dreclined even more in 2015. In 2016 oil entered an upward trend and so did the operating profits with a sharp increase of 249% resulting in a net profit increase of 179%.

This positive trend continued in profit growth until 2018 november when a sharp decline in oil prices again affected profits negatively for the year end period, with opering profit growing only at 2% and net income decreasing by a slim margin of 2%. It is clear that oil price fluctuations affected profit growth at MOL between 2014-2018.

Operating revenues and expenses growth 40% 28% 30% 26% 20% 20% 20%

10%

-10% -8% -9% -20% -15%

-30% -25% -26% -29% -40%

Total operating revenues Total operating expenses

Figure 31. Operating revenues and expenses growth

It is relevant that operating revenues declined and increased identically as operating expenses between 2014-2018, due to capital expenditure cuts that resulted from the price fluctuations of oil. When oil prices dropped so did the operating revenues and operating expenses and when it increased so did operating revenues and expenses.

Raw materials and personnel expenses growth 40% 32% 30% 23% 20% 10% 7% 10% 3% 0%

-10% -9% -11% -20% -15% -16% -30%

-40% -35% Raw material and consumables used Personnel expenses

Figure 32. Raw materials and personnel expenses growth

What is important to notice from operating expenses is that the growth of raw materials and consumables used and personnel expenses have decreased as oil price declined between 2014-2016. Oil prices started falling in 2014 so personnel were not immeadietly 33

affected in 2014 with a slight increase of 3% but in 2015 the drop was more singinificant with a 15% decrease. Raw materials and consumables used reflect much better how the change in oil prices have also reduced the costs for raw materials and consumables between 2014-2015. As oil prices started to climb upwards in 2017 so did the personnel expenses and raw material and consumables used increased between 2017-2018.

Depreciation, depletion, amortisation and impairment (USD mn) 3500 3035 3000

2500

2000 1581 1514 1500 1118 1166 1000

500

0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Figure 33. Depreciation, amortization

In 2014, depreciation expenses decreased by 30% to reach 1581mn USD mainly as a result of fewer one-off impairment charges compared to those recognized in 2013. In 2015, depreciation expenses increased by 92% to 3035mn USD compared to 2014, mainly as a result of one-off impairment charges (writing off worthless goodwill) recognized in 2015 because of falling oil prices. This is further stated in the 2015 annual report in the letter from the CEO ”The severe reduction in oil prices combined with poor geology in some of our operations, led to the revision of the fair value of our Upstream assets, which in turn resulted in material impairment charges.” (MOL Group Annual report 2015b, 7.)

Total finance gain / (expense), net (mn USD) 0 2014 2015 2016 2017 2018 -50 -25 -100 -150 -134 -200 -176 -250 -300 -350 -331 -400 -450 -500 -448

Figure 34. Total net finance gain / expense

MOL reported a financial expense every year between 2014-2018. Financial gain is made up of interest income, dividend income, foreign exchange gains and other finance income. Financial loss is made of interest expense, foreign exchange losses, discount on provisions and other financial expenses.

Financial income / expense growth 200% 112% 86% 94% 100% 64% 47% 57% 24% 9%26% 29% 0%

-100% -45% -46% -28% -84% -200%

-300%

-400%

-500% -443%

Total financial income Total financial expense Financial (expense) / gain, net

Figure 35. Financial income / expense growth

When financial expenses increased more than financial income the financial gain was negative evidently. In 2014 Net financial expenses increased by 84% to 600mn in 2014 compared to 366mn in 2013, due to higher foreign exchange losses which increased by 290%. In 2015 net financial expenses declined by 26% to 331mn due to higher foreign exchange gains which increased total financial income by 112%. In 2016 net financial expense declined by 47% due to lower foreign exchange losses which decreased by 66%. In 2017 net financial expenses declined by 86% due to decrease in total financial expense by 28% and increase in total financial income by 29%. In 2018 net financial expense decreased by 443% due to large foreign exchange loss that increased by 208% thus increased total financial expense by 94%.

Total financial income has increased in every year due to higher foreign exchange gains except in 2016 when it dropped by 45% due lower foreign exchange gains and interest income. This was offset by financial expenses being lower by 46% driven by lower foreign exchange losses compared to the previous year that resulted in a net financial gain of 47% in 2016. Dividend income has been increasing every year between 2014-2018. Total financial expense has increased in 2014 by 64 % and in 2018 by 94% due to higher foreign exchange losses than the previous year. Net financial gain decreased in 2014 by - 84% and in 2018 by 443 % due to higher foreign exchange losses and other financial expenses. Net financial gain has been negative, resulting in a net financial expense every

year mainly due to foreign exchange losses outweighing foreign exchange gains every year except in 2017 when foreign exchange gains beat foreign exchange losses due to strengthening HUF against USD.

Foreign Exchange gians and losses (USD mn) 100% 90% 80% 115 139 354 70% 407 60% 50% 138 40% 30% 176 137 289 20% 251 10% 0% 3 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Foreign exchange gains Foreign exchange losses

Figure 36. Foreign exchange gains and losses

The major contributing factor for financial loss is the weak HUF against the USD. In 2014 weakening HUF created a net foreign exchange loss of 138mn USD on borrowings and payables. Foreign exchange losses have outweighed foreign exchange gains every year except in 2017 due to strengthening HUF against the US dollar.

Interest income/expense (USD mn) 250

200

150 182 100 142 126 50 89 79 46 28 0 12 15 22 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Interest income Interest expense

Figure 37. Interest income / expense

Another contributing factor for net financial expense every year is interest expense outweighing interest income. Even though interest expense has been decreasing every year since 2014, and interest income has been increasing since 2016, interest expense is still significantly larger than interest income.

5.1.2 Horizontal analysis of the Balance Sheet Table 3. Consolidated Balance Sheet of MOL Group in USD mn 2014-2018

Balance sheet (USD mn) 2014 2015 2016 2017 2018 Assets Non-current assets Property, plant and 8,975 7,820 7,469 8,736 8,095 equipment Intangible assets 1,326 826 625 701 696 Investments in associated 592 666 875 797 706 companies Other non-current financial 74 99 217 303 436 assets Deferred tax asset 268 398 426 466 485 Other non-current assets 363 159 151 169 318 Total non-current assets 11,598 10,036 9,763 11,172 10,736 Current assets Inventories 1,302 1,225 1,311 1,687 1,754 Trade and other receivables 1,611 1,329 1,623 2,082 2,095 Marketable Securities 795 222 184 101 9 Other current financial assets 515 484 325 489 353 Income tax receivable 57 21 27 38 103 Cash and cash equivalents 728 464 739 781 1,365 Total current assets 5,007 3,745 4,210 5,178 5,679 Total assets 16,605 13,781 13,973 16,350 16,415 Liabilities and shareholders’ equity Shareholders’ equity Share capital 283 278 270 306 282 Reserves 5,952 5,733 3,914 5,235 5,745 Net income attributable to eq- 15 (900) 897 1,186 1,072 uity holders of the parent Equity attributable to equity 6,249 5,111 5,081 6,727 7,099 holders of the parent Minority interest 1,593 1,278 1,053 1,216 1,123 Total equity 7,842 6,389 6,134 7,943 8,222 Non-current liabilities Long-term debt 1,625 1,620 1,488 1,900 1,263 Provisions - long-term 1,404 1,459 1,401 1,703 1,705 Deferred tax liabilities 178 236 163 193 183 Other non-current liabilities 102 107 76 91 83 Total non-current liabilities 3,310 3,422 3,128 3,887 3,234 Current liabilities Short-term debt 1,811 726 1,499 663 1,229 Trade and other payables 3,463 2,991 3,093 3,694 3,598 Provisions - short-term 160 186 110 155 131 Income tax payable 20 54 9 7 2 Total current liabilities 5,454 3,969 4,711 4,520 4,959 Total liabilites 8,764 7,392 7,839 8,407 8,194 Total liabilities and share- 16,605 13,781 13,973 16,350 16,415 holders’ equity

Horizontal or trend analysis of the balance sheet is looked at to see if there are trends over time by computing percentage increases or decreases of balance sheet items relative the previous year. The percentages will be compared to changes in oil prices between 2014-2018 to see to what extent it affected each account and to identify trends.

Looking at the horizontal or trend analysis of the balance sheet items, it is evident that oil price fluctuations have impacted total equity and total assets which have decreased between 2014-2016 as oil prices have declined and increased from 2016 to 2018 as oil prices increased.

Balance Sheet (USD mn) 45000

40000

35000 10332 30000 8764 8407 8194 25000 9081 7392 7839 20000 7842 7,943 8,222 6,389 6,134 15000

10000 19413 16605 16,350 16,415 13,781 13,973 5000

0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Total assets Total equity Total Liabilities

Figure 38. Balance Sheet

It is clear from the figure above that oil price fluctuations reflect the change in total assets and total equity plus total liabilities at the company. As oil prices decreased from 2014 so did total assets and consequently total equity and total liabilities, and as it started to increase in 2016 so did total assets and total equity plus total liabilities. Because total assets equal total equity plus total liabilities, any change in total assets is going to equally change total equity plus total liabilities. Total liabilities have outweighed total equity every year between 2014-2018, except in 2018 when total liabilities were less than total equity.

Balance Sheet growth 40%

29% 30%

20% 17%

10% 6% 7% 4% 1% 0% 0%

-4% -3% -10%

-14% -20% -14% -15% -16% -17% -19%

-30%

Total assets Total equity Total Liabilities

Figure 39. Balance sheet growth

What is important to note is that when oil price decreased total assets have decreased at a similar rate as total equity and total liabilities between 2014 and 2015. In 2016 liabilities have increased 6% while total equity decreased by 4%. As oil prices started to increase in 2017 total assets increased by 17% and total equity increased at a higher rate with 29% than total liabilities at 7%. In 2018 oil prices have increased in the first half of the year then decreased sharply in the last quarter resulting in near 0% percent increase in total assets and a 4% increase in equity plus 3% decrease in liabilities.

Total assets have decreased by 14% in 2014 and by 17% in 2015 due to significant decrease in current assets 34% in 2014 and 25% in 2015 and decrease in non-current assets of -2% 2014 and 13% 2015. Total assets have increased by 17% in 2017 when oil prices increased due to increase of 23% and 14% in both current and non-current assets. Total equity has decreased by 14% in 2014, by 19% in 2015 and by 4% in 2016 due to low oil prices that influenced share capital and reserves that decreased as well. In 2017 when oil prices started to increase so did total equity by increased 29%.

Total liabilities had been affected by oil price fluctuations between 2014 and 2015 by a decrease of 15% in 2014 and a decrease 16 % in 2015. In 2014 the decrease was due to long term debt being decreased by 42% and trade and other payables by 20%, while in 2015 it was due to the 60% decrease in short term debt and a 14% decrease in trade and other payables. Total liabilities increased when oil prices started to rise as well in 2016 by 6% and in 2017 by 7%.

Assets growth 30% 23%

20% 14% 12% 10% 10%

0% -2% -3% -10% -4%

-13% -20%

-30% -25%

-34% -40%

Total non-current assets Total current assets

Figure 40. Assets growth

The oil price fluctuations indicate the change in non-current and current assets, as oil prices have fallen so did current and non-current assets between 2014-2015, and as it had risen so did current assets in 2016 and non-current assets in 2017. It is important to note that current assets have been affected more by oil price fluctuations obviously as energy companies cannot sell off or divest non-current assets as quickly due to large investments in property plant and equipment intended for long term investments.

Current Assets growth 200% 169%

150%

100% 75% 59% 50% 28% 41% 22% 29% 28% 7% 6% 4% 1% 0% -6% -25% -17% -50% -33% -36%

-65% -69% -63% -100%

Inventories Trade receivables net Income tax receivable Cash and cash equivalents

Figure 41. Current assets growth

Current assets are assets that expected to be converted to cash within a year. Looking at individual items of current assets oil price fluctuations reflected the growth more evidently with a sharp decline in 2014 in inventories, trade and income tax receivables, and cash and cash equivalents. Oil price decrease affected liquid assets the most as these can be turned into cash the fastest to pay of current liabilities such as short-term debt which has increased by 40% during 2014 when oil prices dropped. Cash is the most liquid asset and it has decreased by 69% in 2014 and 36% in 2016 during low oil prices and has increased by 59% in 2016 when oil prices started to increase slowly. The second most liquid asset is marketable securities which has increased in 2014 by a surprising 2787% but has been decreasing every year since 2015. These include liquid financial instruments that can be quickly converted into cash within a year. Trade receivables and inventories are also liquid assets that has decreased when oil prices dropped between 2014-2015 and increased when oil prices rose between 2016-2017. Income tax receivables is the least liquid asset and has decreased during 2014-2015 as profits have declined and increased between 2016-2018.

Non-current assets growth 40% 31% 30%

20% 17% 11% 13% 12% 10%

0% -2% -1% -10% -4% -5% -9% -7% -11% -20% -13%

-30% -24%

-40% -38% -50%

Intangible assets Property plant and equipment Investments in associated companies

Figure 42. Non-current assets growth

Noncurrent assets are asset that are not expected to convert to cash in one year. Non- current assets have been affected by oil price changes as well though it was slower to react than current assets especially property plant and equipment which has decreased in 2014 by 2% but in 2015 by 38% and in 2016 by 24%. Intangible assets have also decreased between 2014-2016 and increased between 2017-2018. What is important to note is that investment in associated companies have increased when oil prices were lower during 2014-2016 and decreased when oil prices increased in 2017-2018.

Shareholder equity growth

40% 34% 32% 30%

20% 13% 10% 10% 6% 0% -1% -10% -2%-4% -3% -8% -11% -20% -14% -12% -18% -30% -40% -32%

Share capital Reserves Equity attributable to equity holders of the parent

Figure 43. Shareholder equity growth

Shareholder equity has been directly affected by oil price fluctuations, with share capital, reserves and equity attributable to equity holders of the parent decreasing between 2014- 2016 and increasing in 2017 sharply and slightly in 2018 with equity decreasing in 2018.

Share capital which are funds raised in exchange for issuing share in a company in return for cash has decreased the most in 2014 with 14% when oil prices declined and increased the most in 2017 with 13% when oil prices started to increase. Reserves which are profit at the end of a financial year kept in the business to meet future obligations have decreased the most in 2016 by 32% and has decreased between 2014-2016 during low oil prices and increased between 2017-2018 when oils prices increased. Equity attributable to equity holders of the parent have increased and decreased at the same rate as total equity, decreasing by 18% when total equity has decreased the most by 19% in 2015 when oil prices hit the lowest, and increased by 32% when total equity increased by 29% due to increasing oil prices.

Net income attributable to equity holders of the parent (USD mn)

1500 1,186 1,072 897 1000

500 15 0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 -500

-1000 (900) -1500

Figure 44. Net income attributable to equity holders of the parent 42

Net income attributable to equity holders of the parent decreased by 6280% in 2015 to negative 900mn USD when net income has decreased the most by 423% to -1141mn USD. Even though net income was negative in 2014 with -218mn USD 15mn was attributed to equity holders of the parent.

Equity attribution (USD mn) 9000 8000 14% 15% 7000 20% 6000 20% 17% 5000 4000 85% 86% 3000 80% 80% 83% 2000 1000 0 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Equity attributable to equity holders of the parent Non-controlling interest

Figure 45. Equity attribution

Equity attribution has been noted to have decreased with oil price decrease and increased as oil prices have increased as well. The share of equity attributable to equity holders of the parent was 80% in 2014 and has been steadily increasing over the years and at the same the share of equity attributed to non-controlling interest has been decreasing since 2014.

Liabilities growth

30% 24% 19% 20% 10% 10% 3% 0%

-4% -10% -6% -9%

-20% -17%

-30% -27% -27% Total non-current liabilites Total current liabilities

Figure 46. Liabilities growth

Total non-current liabilities have decreased the most in 2014 by 27% when oil prices dropped the most and increased the most in 2017 by 24% when oil prices increased the most. The drop in 2014 was due to long-term debt decreased by 42% while the increase in 2017 was due to long-term debt increasing by 28%. Total current liabilities have decreased the most in 2015 by 27% due to short term debt decreased by 60% and increased the most in 2016 by 19% when short term debt increased by 107% compared to the previous year.

Income tax payable growth 200% 170%

150%

100% 87%

50%

-50% -24%

-68% -100% -83%

Figure 47. Income Tax payable growth

Income tax payable is compiled of taxes due to the government within one year. It has increased between 2014-2015 when net income decreased as oil prices were low and decreased between 2016-2018 when net income increased as oil prices increased.

Trade and other payables growth 25% 19% 20% 15% 10% 5% 3% 0%

-5% -3% -10% -15% -14% -20% -20% -25%

Figure 48. Trade and other payables growth

Trade and other payables which are billed to a company by its suppliers have decreased in 2014 by 20% and in 2016 by 14% due to lower oil prices leading to lower orders for 44

suppliers for goods and or services to the company. In 2016 it has increased by 3% and in 2017 by 19% when oil prices started to increase. In 2018 it decreased by 3% as oil prices decreased in the second half of 2018.

5.2 Vertical analysis.

5.2.1 Vertical analysis of the Income Statement

Vertical or common size analysis of the income statement is used for measuring a company’s performance from year to year in terms of cost and profitability. Vertical analysis of the income statement is calculated by stating each line item on the income statement as a percentage of total operating revenues. (Wall street mojo 2019a) Percentage items of total sales will be compared to oil price changes between 2014-2018 to see if there is a trend.

Table 4. Vertical analysis of the income statement of MOL Group 2014-2018 Income statement (USD mn) 2014 2015 2016 2017 2018 Net sales 99% 98% 99% 99% 99% Other operating income 1% 2% 1% 1% 1% Total operating revenues 100% 100% 100% 100% 100% Raw material and consumables 80% 73% 72% 74% 78% used Personnel expenses 5% 6% 7% 6% 5% Depreciation, depletion, amorti- 8% 20% 9% 8% 8% zation and impairment Change in inventory of finished 2% 1% -1% -1% -1% goods & work in progress Work performed by the enter- -1% -1% -1% -1% -1% prise and capitalized Other operating expenses 6% 6% 6% 6% 5% Total operating expenses 99% 105% 91% 92% 93% Operating Profit 1% -5% 9% 8% 7% Interest income 0% 0% 0% 0% 0% Dividend income 0% 0% 0% 0% 0% Foreign exchange gains 0% 2% 1% 1% 2% Other finance income 0% 0% 0% 0% 0% Total financial income 1% 2% 1% 1% 2% Interest expense 1% 1% 1% 1% 0% Foreign exchange losses 1% 3% 1% 1% 2% Interest on provisions 0% 0% 0% 0% 0% Other financial expenses 1% 0% 0% 0% 0% Total financial expense 3% 4% 3% 2% 3% Financial (expense) / gain, net -2% -2% -1% 0% -1% Income from associates 0% 0% 0% 0% 0% Profit / (loss) before tax -1% -7% 8% 9% 6% Income tax expense 0% 1% 1% 1% 1% Net Income -1% -8% 7% 8% 6%

Looking at the vertical analysis of the income statement as oil prices declined from 2014 to 2015 so did the share of operating profit and net income of total revenues have decreased as well. As oil prices increased from 2016 so did the share of operating profit and net income increased and turned positive and stayed until 2018 when oil prices were higher during the same period resulting in a larger share than before 2016. The share of operating expenses was high in 2014 with 99% and surpasses total operating revenues in 2015 with 105% when oil prices were lower. As oil prices increased from 2016 the share of operating expenses of total operating revenues decreased to 91% in 2016, and only increased by 1% from 2017 to 2018 each year, resulting in 93% in 2018.

Share of Operating expenses and Operating Profit 120%

100% 1% 9% 8% 7%

80%

60% 105% 99% 91% 92% 93% 40%

20%

0% -5% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

-20%

Total operating expenses Profit / (loss) from operation

Figure 49. Share of operating expenses and operating profit

Total operating expenses amounted for 99% percent of total operating revenues, while operating profit was 1% in 2014. As oil prices decreased operating expenses outweighed total operating revenues being 105% and operating profit turning to negative with -5% in 2015 due to lower operating revenues. In 2016 oil prices started to increase and so did operating profit representing 9% of total operating revenues, due to lower operating expenses being 91%. As oil prices started to increase operating profit stabilized but decreased by 1% each year between 2016-2018 due to total operating expenses increasing by 1% every year mainly because of rising raw material and consumables costs each year.

Share of Net Income 10% 8% 8% 7% 6% 6% 4% 2% 0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 -2% -1% -4% -6% -8% -8% -10%

Figure 50. Share of net income

Net income was negative in 2014 and 2015 amounting -1% in 2014 and -8% in 2015 of total operating revenues as oil prices dropped. In 2016 when oil prices increased net income was 7% of total operating revenues and 8% in 2017 due to lower operating expenses in 2016 and higher operating revenues in 2017. As oil prices dropped in the fourth quarter of 2018 it had a negative effect on net income by decreasing to 6% of total operating revenues, even though total operating revenues and operating profit increased compared to 2017, so did operating expenses and financial expenses with higher costs of raw material and consumables used and larger foreign exchange losses.

Share of Operating expenses 120%

100%

8% 20% 8% 8% 80% 5% 9% 5% 5% 6% 7%

60%

40% 80% 73% 72% 78% 78%

20%

0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Depreciation, depletion, amortisation and impairment Personnel expenses Raw material and consumables used

Figure 51. Share of operating expenses

Looking at the major individual items of operating expenses raw material and consumables used represent the highest share of operating expenses in relation to total operating revenues weighting between 70-80% depending on oil price fluctuations. As oil prices started to decrease so did the share of raw material and consumables used between 2015-2016, and as it started to increase so did the share of raw materials and consuma- ble expenses in relation to total operating revenues increase between 2017-2018. Person- nel expenses made up 5%-7% of total operating revenues between 2014-2018. Deprecia- tion made up 8-9% of total operating revenues between 2014-2018, except in 2015 when it rose to 20% due to one-off impairment charges recognized in 2015.

Share of Financial gain/expense 5% 4% 4%

3% 3% 3% 3% 2% 2% 2% 2% 1% 1%

1% 1%

0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 -1% 0% -1%

-2% -1% -2% -2% -3%

Total financial income Total financial expense Financial (expense) / gain, net

Figure 52. Share of financial gain / expense

Financial expense made up 2-4% of total operating revenues between 2014-2018 while total financial income made up 1-2%. Financial expense was -2% of total operating revenues but had increased to 0% in 2017 and decreased again in 2018 to -1%.

5.2.2 Vertical analysis of the Balance Sheet

Vertical Analysis on or common-size analysis of the balance sheet involves stating each item of the balance sheet as a percentage of total assets in order to understand how each item of the balance sheet has changed over the years. (Wall street mojo 2019b) Percent- age items of total assets will be compared oil price changes between 2014-2018 to see if the movements in oil prices reflect changes in the accounts and identify trends over time.

Table 5. Vertical analysis of the Balance sheet of MOL Group 2014-2018

Balance sheet statement 2014 2015 2016 2017 2018 Assets Non-current assets Intangible assets 54% 57% 53% 53% 49% Property plant and equipment 8% 6% 4% 4% 4% Investments in associated companies 4% 5% 6% 5% 4% Available-for-sale investments 0% 1% 2% 2% 3% Deferred tax asset 2% 3% 3% 3% 3% Other non-current assets 2% 1% 1% 1% 2% Total non-current assets 70% 73% 70% 68% 65% Current assets Inventories 8% 9% 9% 10% 11% Trade receivables net 10% 10% 12% 13% 13% Marketable securities 5% 2% 1% 1% 0% Other current assets 3% 4% 2% 3% 2% Income tax receivable 0% 0% 0% 0% 1% Cash and cash equivalents 4% 3% 5% 5% 8% Total current assets 30% 27% 30% 32% 35% Total assets 100% 100% 100% 100% 100% Liabilities and shareholders’ equity Shareholders’ equity Share capital 2% 2% 2% 2% 2% Reserves 36% 42% 28% 32% 35% Net income attributable to equity holders of 0% -7% 6% 7% 7% the parent Equity attributable to equity holders of 38% 37% 36% 41% 43% the parent Minority interest 10% 9% 8% 7% 7% Total equity 47% 46% 44% 49% 50% Non-current liabilities Long-term debt net of current portion 10% 12% 11% 12% 8% Provisions for liabilities and charges 8% 11% 10% 10% 10% Deferred tax liability 1% 2% 1% 1% 1% Other non-current liabilities 1% 1% 1% 1% 1% Total non-current liabilites 20% 25% 22% 24% 20% Current liabilities Short-term debt 11% 5% 11% 4% 7% Trade and other payables 21% 22% 22% 23% 22% Provisions - short-term 1% 1% 1% 1% 1% Income tax payable 0% 0% 0% 0% 0% Total current liabilities 33% 29% 34% 28% 30% Total liabilities and shareholders’ equity 100% 100% 100% 100% 100%

Looking at the vertical analysis of the balance sheet items it is obvious that the share of total equity of total assets was lower during lower oil prices between 2014-2016 than after 2016 when oil prices increased.

Share of Assets 100% 90% 30% 27% 30% 32% 80% 35% 70% 60% 50% 40% 70% 73% 70% 68% 30% 65% 20% 10% 0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Total non-current assets Total current assets

Figure 53. Share of assets

Total non-current assets made up 70% of total assets in 2014 while total current assets 30% of total assets. This is normal for energy companies as they have large investments in property plant and equipment. Total current assets have decreased in 2015 to 27% and non-current assets have increased to 73%. The share of total current assets has been increasing since 2016, while non-current assets have been decreasing at same time. This is mainly due to less investments in the Upstream division due to lower oil prices and thus less profitability from that segment and investments in Downstream petrochemical and consumer services.

Share of Non-current assets 0% 100% 1% 4% 2% 2% 3% 5% 6% 5% 90% 4% 8% 6% 4% 4% 4% 80% 70% 60% 50% 40% 54% 57% 53% 53% 49% 30% 20% 10% 0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Property, plant and equipment Intangible assets Investments in associated companies Other non-current financial assets

Figure 54. Share of non-current assets 50

Being an energy company, property plant and equipment is the largest item of non-current assets making up over half of total assets at MOL with 54% in 2014, 57% in 2015 and 53% in 2016-2017. In 2018 the share fell to 49 % due to less capital investment in long term assets due to oil price uncertainty. Intangible assets which are not physical in nature were 8% of total assets in 2014 and has since decreased to 4% in 2018, while other non- current financial assets have been increasing since 2014 from 0% to 3% in 2018. Invest- ment in associated companies stayed between 4-6% during 2014-2018.

Share of Current Assets 100% 4% 3% 90% 5% 5% 8% 4% 80% 3% 2% 3% 1% 70% 2% 1% 2% 5% 0% 60% 13% 50% 10% 12% 13%

40% 10%

30%

20% 9% 9% 10% 11% 8% 10%

0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Inventories Trade receivables net Marketable securities Other current assets Cash and cash equivalents

Figure 55. Share of current assets

The share of inventories has stayed at 8-9% when oil prices were low during 2014-2015 and increased slightly to 10-11% between 2017-2018 when oil prices increased. Trade and other receivables the largest item of current assets have been increasing from 10% in 2015 to 13% in 2018, as oil prices stabilized. The share of marketable securities has decreased from 5% of total assets to 0% in 2018. Other current assets represent between 2- 4% of total assets. Cash and cash equivalents stayed at 4-3% between 2014-2015 when oil prices were low and increased from 5% in 2016 to 8% in 2018 as price of oil increased.

Share of Total liabilities and shareholders’ equity 100% 90% 29% 28% 30% 80% 33% 34% 70% 60% 25% 24% 20% 20% 22% 50% 40% 30% 49% 50% 20% 47% 46% 44% 10% 0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Total equity Total non-current liabilities Total current liabilities

Figure 56. Share of total liabilities and shareholders’ equity

Looking at total liabilities and shareholders’ equity of the balance sheet, the share of total equity has been fluctuating proportionally compared to oil price fluctuations. Total equity has decreased in 2014 from 47% to 44% in 2016 during low oil prices and has increased to 49% in 2017 and 50% in 2018 during higher oil prices. Total current liabilities make up larger share than total non-current liabilities of the total liabilities. The share of total current liabilities were a larger part of total liabilities and total equity when short term debt ac- counted more.

Share of Long term and short term debt 25%

20%

11% 15% 11% 5% 4% 7% 10%

12% 12% 5% 10% 11% 8%

0% FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Long-term debt net of current portion Short-term debt

Figure 57. Share of long-term and short-term debt

When long term debt accounts more of the total liabilities and shareholder’s equity then the share of short-term debt then the share of total non-current liabilities increased like it did in 2015 and 2017 when short term debt was 5% and 4% and the share of non-current liabilities were 25% and 24%. 52

To conclude the results of the financial statement analysis oil price fluctuations affected both the income statement and the balance sheet items between 2014-2018 at MOL group. The most significant change in the income statement was the decrease in operating and net profit between 2014-2015 when oil prices declined. Consequently, the oil price drop affected items in the balance sheet as well with equity decreasing between 2014- 2016 due to low oil price environment. Total liabilities have not been affected significantly between 2014-2018. As oil prices started to increase in 2017 the trend changed and operating, and net profit increased as well as equity from 2016-2018. As oil prices decreased operating expenses have decreased as well helping to maintain high operating cash flow between 2014-2018.

6. Financial Ratio Analysis

Financial ratio analysis is another tool that helps to identify changes in a company’s financial situation. To get a better picture of the financial situation and performance of the company several ratios will be analyzed together and compared from year 2014 to 2018. In this chapter MOL’s profitability, liquidity, leverage and shareholder ratios will be analyzed and benchmarked against its largest local competitor OMV in accordance with oil price fluctuations to see if there is an underlying trend oil price changes having a clear effect on the developments of each ratio between 2014-2018.

6.1 Profitability Ratios

Profitability ratios are a set of ratios used to determine the ability of a business to create profitable sales from its assets. Profitability ratios are positive when they improve over time or are comparatively better than the results of competitors. (Accounting tools 2019b) In case the profitability ratios move in the same or similar direction as changes in oil prices than there is a clear correlation

Operating Profit Margin

Operating Profit Margin is a profitability ratio which measures the company’s operating efficiency. It is calculated by dividing the operating profit by total revenue, and expressing it as a percentage. It shows the profit a company makes from its operations, before subtracting taxes and interest charges but after paying for variable costs of production, such as wages and raw materials. (Corporate finance institute 2019a, Investopedia 2019k)

Operating Profit Margin % 20% 15% 10% 5% 0% -5% -10% -15% 2014 2015 2016 2017 2018 MOL 1% -5% 9% 8% 7% OMV 3% -9% -4% 9% 15%

MOL OMV

Figure 58. Operating profit margin

The decline in oil price affected the operating profit margin of both MOL and OMV negatively in 2014 and 2015. In 2014 both companies reported a positive operating profit margin with OMV having higher than MOL, and in 2015 with MOL reporting a better margin with -5%, than OMV with a -9%margin. In 2016 MOL was able to recover as oil prices started to increase, reporting a positive operating margin of 9%, however it has decreased in 2017 to 8% and in 2018 to 7%. The recovery for OMV took one year longer, reporting a negative operating profit margin in 2016 of -4% but was able to recover in 2017 with a positive 9% and surpass MOL in 2017 by 1% and in 2018 by 8%. The sharp decline in oil prices effected operating profit margins at MOL in 2014 and 2015 negatively as it caused operating expenses to outgrow operating revenues thus operating profit turning to -5% in 2016. As operating profit increased between 2016-2018 due to lower operating expenses and growing sales revenues resulting from oil price increasing between 2016-2018, MOL managed to turn positive operating profit margin between 2016-2018, even though it has decreased by 1% every year due to the lower share of operating profit and higher share of operating expenses of total operating revenues each year by 1%.

Net Profit Margin

Net Profit Margin is a profitability ratio used to calculate the percentage of profit a company produces from its total revenue after all expenses has been deducted. It measures the amount of net profit a company generates per dollar of revenue gained. The profit margin is equal to net profit or net income divided by total revenue, expressed as a percentage. (Corporate finance institute 2019b)

Net profit margin % 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 2014 2015 2016 2017 2018 MOL -1% -8% 7% 8% 6% OMV 1% -6% -1% 4% 9%

MOL OMV

Figure 59. Net profit margin

Looking at the trend of recovery from oil price decline, OMV was able to withstand the oil price drop with a better net profit margin in 2014 of 1% and 2015 with -6% compared to MOL at the same year. MOL reported a better net profit margin in 2016 with 7% and in 2017 with 8% compared to OMV at the same year, however in 2018 OMV surpassed MOL’s net profit margin by 3% as MOL’s margin have declined by 2% compared to the previous year. The sharp decline in oil prices affected net profit margin at MOL negatively in 2014 and especially in 2015 as the decrease in net sales revenues was higher than the decrease in operating expenses in 2015 resulting in a ratio of -8%. From 2016 net sales revenues grew higher than operating expenses as a result of an increase in oil prices until the first half of 2018 causing net profit margin to stay positive. In the second half of 2018 oil prices dropped again and so did net income growth declined by 2% causing net profit margin to decline as well.

Return on total assets (ROTA)

The return on total assets (ROTA) is a profitability ratio that measures a company's earnings before interest and taxes (EBIT) or operating profit relative to its total net assets. The reason operating profit is used instead of net profit is to keep the ratio focused on operating earnings without the influence of tax or financing differences when compared to similar companies. The ratio is considered to be an indicator of how efficiently a company is using its assets to generate earnings. (Investopedia 2019l)

Return on total assets % 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2014 2015 2016 2017 2018 MOL 1% -5% 8% 8% 8% OMV 4% -7% -3% 6% 11%

MOL OMV

Figure 60. Return on total assets

Oil price decline have affected return on total assets of both MOL and OMV negatively in 2014 and 2015 with OMV reporting a better margin in 2014 of 3% and MOL reporting a better margin in 2015 of -5%. The recovery for OMV took longer as it posted worse margins between 2015-2017, but surpassed MOL in 2018 by 2%. In 2016 MOL was able to quickly return to positive margin of 8%, while OMV posted a -3%, though MOL was not able to increase its margin after that, while OMV reported a better margin every year since 2016 and surpassed MOL in 2018 with 11% compared to 8%.

The sharp decline in oil prices affected return on total assets at MOL negatively in 2014 and especially in 2015 when it turned -5% due to operating profit turning -783mn USD and total assets decreasing by 17%. In 2016 return on total assets turned positive 8% and stayed until the end of 2018 as operating profit went up by 249% in 2016 and stayed high between 2016-2018 while total assets have not grown substantially between 2016-2018, only in 2017 by 17% keeping return on total assets at 8% throughout the period.

EBITDA Margin (EBITDA To Sales Ratio)

EBITDA margin is an indicator of a company's operating profitability, calculated by dividing EBITDA with total revenue expressed as percentage. Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide with a clear view of a company's operating profitability and cash flow. It is widely used for comparing companies in the same industry. The higher a company's EBITDA margin is, the lower that company's operating expenses are compared to total revenue. (Investopedia 2019m)

EBITDA Margin 30%

25%

20%

15%

10%

0% 2014 2015 2016 2017 2018 MOL 8% 16% 18% 16% 15% OMV 12% 13% 14% 20% 25%

MOL OMV

Figure 61. EBITDA margin

MOL’s operating profitability has been positive and increased from 8% in 2014 to 16% in 2015 despite declining oil prices, while OMV’s operating profitability had increased by 1% from 12% in 2014 to 13% in 2015. Both oil companies managed to keep a positive EBITDA margin throughout 2014-2018 despite challenging environment. While MOL’s EBITDA margin has decreased from 2016 of 18% to 15% in 2018, OMV’s EBITDA margin increased from 14% in 2015 to 25% in 2018. The decline in oil prices affected MOL’s EBITDA margin in 2014 as lower EBITDA came from Downstream segment. From 2015 to 2018 MOL managed to increase its EBITDA margin and increase its operating profitability due to lower oil prices having favorable effect on Upstream segment’s result. Lower oil prices had positive impact on EBITDA margin from 2014-2016 due to total EBITDA growing from improved Upstream division performance, while total revenue was down. Be- tween 2017-2018 EBITDA margin decreased, even though total EBITDA increased, total revenue increased even more.

Return on owners’ equity

Return on equity (ROE) a profitability ratio calculated by dividing net income by shareholders' equity expressed as a percentage . The total return on equity shows the company’s ability to turn assets into profits by measuring the profits made for each dollar from shareholders’ equity. (Corporate finance institute 2019c, Investopedia 2019n)

Return on owners equity 20% 15% 10% 5% 0% -5% -10% -15% -20% 2014 2015 2016 2017 2018 MOL -3% -18% 15% 14% 14% OMV 4% -9% -1% 7% 15%

MOL OMV

Figure 62. Return on owners’ equity

Return on owners’ equity have been negative in 2014 for MOL with -3%, while OMV still maintained a positive 4%. However, in 2015 due to oil price decline both companies reported negative ratios with MOL reporting a lower ratio of -18% compared to OMV’s -9%. In 2016 MOL quickly recovered to a positive ratio of 15% and remained at 14% between 2017-2018, while OMV still reported a negative ratio of -1% in 2016 but was able to recover year by year reaching 15% in 2018 surpassing MOL by 1%. The sharp decline in oil prices affected return on owners’ equity at MOL negatively in 2014 and 2015 when it turned -3% and -18% due to net income being negative and decreasing by 176% in 2014 by 423% in 2015 while shareholders equity decreased as well by 14% in 2014 and by 19% in 2015. In 2016 when oil prices started to increase, return on owners’ equity turned positive 15% as net income increased by 179 % due to higher operating profit and lower operating expenses. In 2017 the margin fell to 14% as total shareholders’ equity increased by 29% while net income increased by 27% In 2018 when oil prices fell again net income decreased by 2% but return on owner’s equity stayed at 14%.

In conclusion, all profitability ratios show a similar trend with both MOL and OMV reporting negative margins in 2015 due to low oil prices, and MOL recovering quicker in 2016 when oil prices started to increase. The only exception is EBITDA margin which has improved in 2015 due to operating cash flow outweighing capital expenditure. However, MOL’s profitability ratios remained relatively the same between 2017-2018 when oil prices were increasing slowly, while OMV recovered slower between 2016-2017. OMV surpassed MOL in EBITDA margin from 2017-2018 and by 2018 it beat MOL in all profitability ratios,

6.2 Liquidity Ratios

Liquidity ratios are measurements used to evaluate the ability of an organization to pay off its short-term liabilities. The higher the liquidity ratios the more liquid assets the company has available to pay off its short-term debt obligations. (Accounting tools 2019c)

Current ratio

The current ratio is a liquidity ratio that measures a company's ability to pay for short-term liabilities or those due within one year with its current assets. It is calculated by dividing current assets with current liabilities. (Investopedia 2019o) A higher ratio indicates a higher level of liquidity meaning that the company has more than enough assets to pay short term liabilities. A lower ratio indicates less liquidity, meaning a greater dependence on operating cash flow and outside financing to meet short-term obligations. (Robinson & Elaine 2015) A strong current ratio is 1.5 which indicates that the company has 1.5 in current assets for every 1 in current liabilities. (Harrison & Thomas 2018)

Current Ratio / Working capital ratio 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2014 2015 2016 2017 2018 MOL 0.92 0.94 0.89 1.15 1.15 OMV 0.94 1.06 1.14 1.38 1.24

MOL OMV

Figure 63. Current ratio / working capital ratio

Current ratio was lower during low oil prices between 2014-2016 and higher when oil prices increased in 2017 for both companies, meaning they were better being able to repay short-term obligations when oil prices increased due to more resources available resulting in less short-term debt. It is visible that OMV has better current ratios every year between 2014-2018 compared to MOL, even though in 2018 the current ratio of OMV decreased to 1.24, while MOL remained the same at 1.15. As oil prices were lower between

2014 and 2016 MOL’s current ratios have been low as well in the same period due to current liabilities outweighing current assets. Current liabilities were higher than current assets, even though it has decreased by 6% in 2014 and by 27% in 2015 current assets have decreased at even higher rate of 34% in 2014 and 25% in 2015. This is mainly due to cash decreasing by 69/ in 2014 and 36% in 2015 and inventories decreased 33% in 2014 and 6% in 2015 due to decreasing and lower oil prices. In 2016 current liabilities have increased more than current assets causing current ratio to be below 1 as oil prices bottomed. From 2017 as oil prices started to increase the current ratio a MOL climbed above 1 and stayed at 1,15 until 2018 as it had more current assets than current liabilities due to an increase in cash, reserves and trade and income tax receivables.

Quick ratio

The quick ratio is a liquidity ratio which tells whether the business can pay its current liabilities if they came due immediately. To calculate it liquid assets such as cash and accounts receivables are divided by current liabilities. (Harrison & Thomas 2018) The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term liabilities with the most liquid assets. A quick ratio of 1 is a good quick ratio, as it means that the company has enough assets that can be instantly liquidated to pay off its current liabilities. A quick ratio of less than 1 means that the company might not be able to pay off all its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly pay off its current liabilities. (In- vestopedia 2019p)

Quick Ratio 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2014 2015 2016 2017 2018 MOL 0.58 0.51 0.55 0.66 0.72 OMV 0.43 0.50 0.68 0.95 0.76

MOL OMV

Figure 64. Quick ratio

The low oil prices affected the quick ratio of both companies negatively to some extent with MOL reporting a better ratio in 2014 than OMV. In 2015 both MOL and OMV had a similar quick ratio of 0,5 and 0,51 when oil prices were the lowest, however OMV reported much better quick ratio between 2016-2017 when oil prices increased than MOL at the same years. In 2018 both companies reported similar ratio of 0,72 and 0,76 when oil prices decreased in the fourth quarter of 2018, with OMV reporting a better quick ratio of 0,76 compared to MOL with 0,72 though MOL reported a better quick ratio compared to the previous year, while OMV reporting a worse one with a decrease in quick ratio in 2018. OMV managed to grow its quick ratio even in 2015 when oil prices declined sharply and grew much faster compared to MOL between 2015-2017. As oil prices were lower between 2014 and 2016 the quick ratio at MOL was also lower due to a decrease in liquid assets, affecting MOL’s liquidity especially decreasing cash, reserves and trade receivables. The quick ratio increased as oil price grew from 2017 to 2018 with MOL increasing its liquid assets as well.

Working capital turnover

The working capital turnover ratio which is also referred to as net sales to working capital is a liquidity ratio which indicates how efficiently the company generates revenue with its working capital. The working capital turnover ratio is calculated by dividing net annual sales with working capital. A high working capital turnover ratio means that the company is more efficient in using its short-term assets and liabilities for generating sales, while a low turnover ratio may indicate that the company is financings its sales by investing in ex- cessive trade receivable and inventory.(Investopedia 2019q)

Working capital turnover 60.00 40.00 20.00 0.00 -20.00 -40.00 -60.00 -80.00 2014 2015 2016 2017 2018 MOL -46.75 -65.16 -25.19 22.96 26.48 OMV -63.57 45.51 20.51 7.86 9.78

MOL OMV

Figure 65. Working capital turnover

In 2014 when oil prices decreased both companies had a negative working capital turnover ratio, as it was an unexpected event both companies had invested heavily in inventory and accounts receivable. OMV was quick to react after the price drop and posted a positive working capital turnover ratio in 2015 and managed to keep it positive until 2018, while MOL still posted a negative working capital turnover ratio between 2015-2016 when oil prices were lower and managed to turn positive in 2017 and 2018 when oil prices increased. As oil prices were lower between 2014 and 2016 working capital turnover at MOL was negative as well due to decreasing net sales revenues and lower working capital. MOL managed to grow its working capital turnover year by year as its working capital improved between 2015-2018 due to rising current assets from oil price increase causing net sales to increase from 2016 to 2018 with both Upstream and Downstream increasing its net sales, generating more cash, trade receivables and inventories.

In conclusion, all liquidity ratios show a similar trend with both MOL reporting lower liquidity ratios between 2014-2016 due to low oil prices. MOL started recovering its liquidity ratios in 2016 when oil prices started to increase, but OMV managed to recover even faster surpassing MOL’s working capital and quick ratio from 2015 to 2018. OMV had posted better working capital turnover and recovered quicker than MOL from 2015 to 2016, but eventually MOL surpassed OMV between 2017-2018 due to higher cash generation and liquidity.

6.3 Financial leverage Ratios

Financial leverage ratios are used to assess how much financial risk the company has taken on. The higher the ratios indicate higher level of leverage, meaning a company has taking on more debt to finance its liabilities than equity, therefore the lower the ratios the better the company is performing financially. Solvency ratio and shareholders’ equity ratio are an exception where the higher the ratio the lower the leverage of the company and thus in a better financial position. Lower leveraged oil companies perform better during lower oil prices as they can borrow more from market more easily.

Solvency ratio

Solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt and other obligations expresses as a percentage. The solvency ratio indicates whether a company’s cash flow is enough to pay for its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the risk that it can’t pay its financial obligations, while a higher ratio indicates that the company can finance its short-term and long-term liabilities with its cash flow without needing external financing. (Investopedia 2019r) 62

Solvency ratio 35%

30%

25%

20%

15%

10%

0% 2014 2015 2016 2017 2018 MOL 14% 26% 26% 28% 32% OMV 19% 21% 20% 17% 19%

MOL OMV

Figure 66. Solvency ratio

Mol has a low solvency ratio of 14% in 2014 when oil prices decreased but the ratio has been increasing every year since 2014, except from 2015 to 2016, when it stayed at 26% despite lower oil prices, while OMV’s solvency ratio has decreased between 2015-2017 from 21% to 17%. MOL has had higher solvency ratios from 2015 to 2018, than OMV due to its strong operating cash flow generating ability, while OMV had substantially lower solvency ratios between 2015-2018, only having higher ratio in 2014 with 19% compared to 14% of MOL. MOL’s solvency ratios has been increasing and was only low during 2014 due to higher total liabilities than between 2015-2018. Despite low oil prices MOL managed to keep its solvency ratio at healthy levels as its high operating cash flow enabled it to not take on more debt to finance its short- and long-term liabilities.

Debt-to-equity ratio

The debt-to-equity ratio measures the amount of debt in proportion to equity, calculated by dividing a company’s total liabilities with its shareholder equity. The ratio is used to evaluate a company's financial leverage. A ratio of 1.0 would indicate equal amounts of liabilities or debt and equity while a ratio higher than 1.0 indicates higher amount of liabilities or debt than equity. A ratio lower than 1.0 indicates higher equity than liabilities. The higher the debt to equity ratio indicates that more debt financing is used than equity financing. The debt to equity ratio is also referred to as a risk or gearing ratio. (Investopedia 2019s)

Debt to equity ratio 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2014 2015 2016 2017 2018 MOL 1.12 1.16 1.28 1.06 1.00 OMV 1.32 1.28 1.21 1.20 1.41

MOL OMV

Figure 67. Debt to equity ratio

MOL’s debt to equity has increased between 2014-2016 during lower oil prices and decreased from 2016 to 2018 when oil prices started to increase. OMV’s debt to equity ratio on the other hand decreased between 2014-2017 when oil prices declined and has and has increased from 2017 to 2018 when oil prices increased.

As oil prices were low MOL’s debt to equity ratio was high between 2014-2016 due to shareholders equity decreasing with a decline in share capital and reserves. As oil prices increased between 2016-2018 MOL’s debt to equity ratios has decreased due to share capital and reserves increasing in shareholders equity.

Shareholders ‘equity ratio

The shareholder equity ratio shows how much money shareholders will receive if a company must liquidate all its assets. The shareholder equity ratio reveals how much of the company's assets are financed by equity, thus the higher the ratio the more its funded by equity. The ratio is expressed as a percentage and is calculated by dividing a company’s total shareholder equity with its total assets. The lower the ratio, the more debt a company has used to finance its assets resulting in lower capital return for shareholders in case of liquidation. (Investopedia 2019t)

Shareholders’equity ratio 60%

50%

40%

30%

20%

10%

0% 2014 2015 2016 2017 2018 MOL 47% 46% 44% 49% 50% OMV 43% 44% 44% 45% 42%

MOL OMV

Figure 68. Shareholder’s equity ratio

MOL’s shareholder equity ratios have decreased as oil prices decreased between 2014- 2016 and increased as oil prices increased between 2016-2018, while OMV’s ratios have increased from 2014 to 2017 slightly and decreased in 2018 after another sharp decline in oil price. The fall in oil prices have decreased MOL’s shareholder equity ratios from 47% in 2014 to 44% in 2016 as shareholders’ equity and total assets have decreased as well. Between 2016-2018 as oil prices increased MOL’s shareholder equity ratio have increased from 44% in 2016 to 50% in 2018 as shareholders equity and total assets have increased as well.

Debt-to-assets ratio

The debt to assets ratio indicates the proportion of a company's assets that are being financed with debt, rather than equity. The ratio is used to determine the financial risk of a business. The higher the ratio the higher the proportion of assets are being funded with debt, while a low ratio indicates that most of asset funding is coming from equity. A higher ratio makes it more difficult to borrow money as it indicates the company will take longer time to repay the loan. A ratio equal to 1 means that the company owns equal amounts of liabilities and assets, while a ratio higher than 1 means it has more liabilities than assets, a lower than 1 ratio means it has more assets than liabilities. A healthy debt to asset ratio lies around 0.4 while above 0.6 makes it difficult to borrow money from the financial market. (Accounting tools 2019d)

Debt-to-assets ratio 0.60 0.58 0.56 0.54 0.52 0.50 0.48 0.46 0.44 2014 2015 2016 2017 2018 MOL 0.53 0.54 0.56 0.51 0.50 OMV 0.57 0.56 0.53 0.54 0.58

MOL OMV

Figure 69. Debt to assets ratio

MOL’s debt to assets ratio has been increasing during oil price decline between 2014- 2016 and decreasing as oil prices increased between 2016-2018. OMV’s debt to assets ratio has decreased as oil prices decreased between 2014-2016 and increased as oil prices increased between 2016-2018. The oil price decline increased MOL’s debt to assets ratio between 2014-2016 as total assets have decreased more than total liabilities. Between 2014-2015 when oil prices declined MOL had better ratios than OMV though it has increased while OMV had worse ratios it managed to decrease to 0.53 in 2016.

From 2016 to 2018 when oil prices increased total assets have increased more than total liabilities causing debt to assets ratio to decrease at MOL while OMV’s ratio increased. Most of the increase in assets came from the rise in inventories and trade receivables.

In general debt to assets ratio was favorable between 2014-2018 at both MOL and OMV staying between 0.50-0.58, meaning that both companies own more assets than liabilities.

Net Debt-to-EBITDA ratio

The net debt to earnings before interest depreciation and amortization (EBITDA) ratio is a measurement of leverage, calculated by dividing total debts with EBITDA. The net debt to EBITDA ratio shows how long a company would need to operate at its current level to pay off all its debt. The higher the ratio the longer the company must generate higher positive cash flow to pay for its debts. In case the company has more cash available than debt, the ratio can be negative. (Investopedia 2019u)

Debt-to-EBITDA ratio 2.50

2.00

1.50

1.00

0.50

0.00 2014 2015 2016 2017 2018 MOL 2.11 1.02 1.35 1.05 0.88 OMV 0.21 0.33 0.42 0.20 0.11

MOL OMV

Figure 70. Debt to EBITDA ratio

MOL’s debt to EBITDA ratio was high in 2014 with 2.11 but has declined sharply from 2014 to 2015 as net operating cash flow exceeded capital expenditure. In 2016 when oil hit its lowest point between 2014-2018 debt to EBITDA ratio has increased but has since decreased from 2016 of 1.35 to 0.88 in 2018. OMV’s debt to EBITDA ratio has increased when oil prices decreased between 2014-2016 and has decreased between 2016-2018 when oil prices increased.

In 2014 debt to EBITDA ratio was high with 2.11 as a result of lower EBITDA from downstream operations.

In 2015 debt to EBITDA ratio declined as “Net operating cash flow exceeded capital expenditure, leading to an even more robust balance sheet with Net debt/EBITDA ratio declining”. (MOL Group Annual Report 2015c)

In 2016 Debt to EBITDA ratio increased as “Net operating cash flow was also down, and capital expenditure fell even more hence free cash flow generation even improved in 2016. While the balance sheet remained robust with a year-end Net debt/EBITDA of 1,35 credit metrics deteriorated somewhat vs the end of 2015 despite the strong cash generation due to the settlement of the Magnolia transaction.” (MOL Group Annual Report 2016b)

In 2017 debt to EBITDA ratio decreased as “Net operating cash flow increased by 8% year-on-year, while capital expenditure was at a similar level in 2017 compared to the previous year, hence free cash flow generation further improved in 2017 year-on-year and 67

exceeded USD 1bn. As a result, the balance sheet substantially strengthened during 2017 and Net debt/EBITDA fell.” (MOL Group Annual Report 2017b)

In 2018 Net debt to EBITDA decreased even further due to strong cash generation from high EBITDA.

In conclusion, MOLs debt to equity and debt to assets ratio was higher during lower oil prices between 2014-2016 and got lower when oil prices increased from 2016 to 2018. Shareholder equity ratio showed a similar trend during the same, meaning leverage were higher during lower oil prices to finance debt obligations and got lower when oil prices increased. The only exception is debt to EBITDA which managed to decrease as oil prices got lower due to strong operating cash flow from cutting operating expenses, and solvency ratio that managed to increase despite lower oil prices due to the company not increasing its liabilities substantially. OMV on the other hand shows opposite trend with lower leverage during lower oil prices and higher leverage when oil prices increased.

6.4 Shareholder Ratios

Shareholder ratios indicates the level of return received by the shareholders of a company. The higher the ratios the higher the return for the shareholders of the company.

Market value per share

Market value per share is the price at which a share of company stock can be purchased in the marketplace, such as on a stock exchange. (Accounting tools 2019e)

Market value per share USD 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2014 2015 2016 2017 2018 MOL 2.84 2.86 3.99 5.66 5.02 OMV 39.76 34.78 34.41 38.13 36.57

MOL OMV

Figure 71. Market value per share 68

OMV’s market value per share is much higher than MOL’s between 2014-2018, though MOL managed to increase its market value per share between 2014-2017 during lower oil prices as a result of positive performance by downstream division generating high operating cahsflow. OMV on the other hand had lower market value per share during lower oil prices between 2015-2016, exposing its vulnerability to oil price fluctuations.

Earnings per share

Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis or how much money a company makes for each share of its stock. A higher EPS means that the company can generate more return for its shareholders due to higher profits and allocate higher portion the profit to each outstanding share of common stock. Since the calculation is affected by how many shares are outstanding, a larger company will have to split its earning into more shares of stocks compared to a smaller company so that the larger company’s earnings per share could be compared to a smaller company’s earnings per share. (My Accounting Course 2019c)

Earnings per Share USD 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 2014 2015 2016 2017 2018 MOL 0.04 -1.27 1.28 1.58 1.59 OMV 1.05 -3.64 -1.32 1.58 5.00

MOL OMV

Figure 71. Earnings per Share

MOL’s earning per share has been low during 2014 when oil prices started to decrease and turned -1.27 in 2015 when it declined further but managed to increase from 2016 to 2018 year by year due to higher oil prices generating higher cash flow from both upstream and downstream. OMV saw its earnings per share decline even further from 2014 to 2015 69

to -3.64 compared to MOL due to oil price decline. Even though OMV reported a -1.32 earnings per share in 2016, it has increased and matched MOL’s earnings per share in 2017 at 1.58 and surpassed MOL in 2018 by posting a 5-dollar earnings per share compared to MOL’s 1.59.

Price to earnings ratio

The price-earnings ratio (P/E ratio) is a measured by dividing the company’s current price per share by its earnings per share (EPS). The ratio is used for valuing companies and to find out whether they are overvalued or undervalued. Generally, a high P/E ratio means that investors are expecting higher earnings growth in the future. (Investopedia 2019v)

The price-earnings ratio 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00 2014 2015 2016 2017 2018 MOL 61.31 -2.09 2.91 3.02 2.77 OMV 37.85 -9.55 -26.16 24.19 7.31

MOL OMV

Figure 72. Price to earnings ratio

Both MOL and OMV saw its price to earnings ratio fall from the highs of 2014 to negatives in 2015 as a reuslt of oil price decline. While MOL had higher price to earnings ratio in 2014 and managed to post positive and stable ratio of 2-3 between 2016-2018 , OMV suffered more with a furher decrease to -26,16 in 2016 as oil bottomed. OMV saw a rapid growth in 2017 as oil prices started to increase posting 24,19 and finally decreasing in 2018 as oil declined again in 2018. OMV’s price to earnings ratio looks to be more influenced by oil price fluctuations than MOL’s.

In conclusion, both MOL and OMV had lower shareholder ratios during lower oil prices, in 2015 both posting negative ratios when oil price declined. MOL managed to post higher

shareholder ratios in 2016 but OMV posted beter ratios after 2017 with higher EPS and prices to earnings ratio. OMVs market value per share is higher than MOL’s between 2014-2018, which could mean that OMV is overvalued or MOL is undervalued.

7. Discussion

7.1 Key findings

It is evident that the fall in oil prices affected MOL’s financial position between 2014-2018. As oil prices decreased from the second half of 2014 and stayed low in 2015 net sales revenues, operating and net profit declined sharply as well, while EBITDA managed to stay positive even during lower oil prices due to strong operating cash flow and lower operating expenses.

Profitability and liquidity ratios have been negatively influenced between 2014-2016 when oil prices declined, but MOL managed to perform well in a challenging environment due to its strong operating cash flow supported by Downstream efficiency and performance. Since MOL is an integrated company it managed to offset the fall in oil prices between 2014-2018 except in 2015 when most of its financial ratios suffered badly and turned negative, though it was not exceptional in the oil and gas industry. MOL managed to grow its EBITDA and operating profit after 2015 due to Downstream performing well during lower oil prices.

Upstream performed less favourably, especially in 2015 when oil prices declined, but managed to gain more net sales revenues as oil prices increased. Consumer services division did exceptionally well, increasing its share of net sales and operating profit every year from 2016.

In 2015 all profitability ratios were hurt badly when oil price declined, except EBITDA margin, but managed to turn positive from 2016 to 2018. From liquidity ratios, working capital turnover has been affected the most which was negative between 2014-2016 due to working capital being negative. Current ratio was also hurt during low oil prices between 2014- 2016 being lower than one 1, therefore the company was inefficient with using its current assets to pay for short-term obligations or those due within one year. As oil prices increased the current ratio went above 1 and working capital turnover turned positive again.

Operating profit and net income have grown substantially between 2016-2018 due to low operating expenses while at the same time high cash generation from Downstream segment and Consumer services.

Financial leverage ratios were affected to some extent between 2014-2016, when oil prices were low, though throughout the period no significant change has happened. Debt to EBITDA has decreased year on year, while EBITDA margin stayed positive as well. Debt to equity and debt to assets ratios have been mildly affected by oil price fluctuations as it was higher during 2014-2016 during lower oil prices and lower during higher oil prices. Solvency ratios have increased from 2014 and remained high throughout the period due to strong operating cash flow and low levels of debt. Shareholders’ equity ratio was lower during 2014-2016 when oil prices were declining and higher as oil prices increased from 2016 to 2018. From shareholder ratios, earnings per share was affected in 2014 by oil price decline and in 2015 when it turned negative. The price to earnings ratio also decreased from the highs of 2014 to negative in 2015 as a result of oil price decline, however it managed to turn positive between 2016-2018 as oil prices increased

In conclusion, many financial ratios were hurt badly as a result of oil price decline in 2014- 2015, but thanks to MOL’s integrated business model it managed to ride the storm and come out strong from 2016 due to sound management and operating efficiency mainly from Downstream, and consumer services segment improvements and rising oil prices.

7.2 Conclusion

Oil price fluctuations affected various financial ratios of MOL, especially profitability, liquidity and shareholder ratios. Oil price decline had affected MOL’s sales revenues, operating profit and net profit between 2014-2015. Due to MOL’s integrated supply chain business model it was able to combat oil price fluctuations between 2015-2018 by optimizing its resources more efficiently and cutting operating expenses to generate larger cash flows. Upstream sector saw decreasing capital expenditure since 2014 and so did other business sectors. Since MOL is very Downstream heavy it even benefited from the lower oil prices to some extent as it was able to generate large EBITDA and operating cash flows. In 2015 most financial ratios and financial measures were negatively impacted as oil prices declined rather quickly. Consumer services is the growing new sector at MOL that continues to be increasing its share of total sales as MOL follows its new strategy of diver- sification of revenue streams and moves into new business areas to explore.

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Appendices Appendix 1. Horizontal analysis of the Income Statement between 2014-2018 (USD mn) Income statement 2013 2014 % 2015 % 2016 % 2017 % 2018 % (USD mn) Growth Growth Growth Growth Growth (2014) (2015) (2016) (2017) (2018) Net sales 22,502 20,887 -7% 14,650 -30% 12,624 -14% 15,114 20% 19,054 26% Other operating 315 114 -64% 301 163% 90 -70% 93 2% 149 61% income Total operating 22,817 21,001 -8% 14,951 -29% 12,714 -15% 15,207 20% 19,203 26% revenues Raw material and 18,410 16,784 -9% 10,869 -35% 9,139 -16% 11,271 23% 14,904 32% consumables used Personnel expenses 1,082 1,117 3% 953 -15% 852 -11% 936 10% 1,000 7% Depreciation, deple- 2,249 1,581 -30% 3,035 92% 1,118 -63% 1,166 4% 1,514 30% tion, amortisation and impairment Change in inventory 103 316 206% 145 -54% (118) -181% (96) 19% (208) -117% of finished goods & work in progress Work performed by (173) (207) -19% (203) 2% (159) 22% (215) -35% (255) -19% the enterprise and capitalized Other operating 1,224 1,239 1% 890 -28% 783 -12% 869 11% 943 9% expenses Total operating 22,895 20,829 -9% 15,689 -25% 11,615 -26% 13,932 20% 17,897 28% expenses Operating profit (78) 172 322% (738) -529% 1,099 249% 1,278 16% 1,305 2% Interest income 63 46 -27% 28 -40% 12 -56% 15 21% 22 49% Dividend income 15 18 17% 19 5% 22 18% 25 13% 26 5% Foreign exchange 0 3 - 251 9638% 137 -45% 176 28% 289 65% gains Other finance income 44 85 92% 23 -73% 4 -84% 11 213% 18 58% Total financial 122 152 24% 321 112% 175 -45% 227 29% 355 57% income Interest expense 198 182 -8% 142 -22% 126 -11% 89 -30% 79 -12% Foreign exchange 35 138 290% 407 194% 139 -66% 115 -17% 354 208% losses Interest on provisions 40 46 14% 37 -20% 31 -15% 25 -20% 38 52% Other financial 92 234 154% 66 -72% 55 -17% 23 -57% 18 -23% expenses Total financial 366 600 64% 652 9% 351 -46% 252 -28% 489 94% expense Financial (expense) (243) (448) -84% (331) 26% (176) 47% (25) 86% (134) -443% / gain, net Income from 84 81 -3% 8 -90% 51 530% 69 35% 55 -21% associates Profit / (loss) before (237) (195) 18% (1,061) -443% 974 192% 1,322 36% 1,226 -7% tax Income tax expense (158) 23 115% 80 244% 74 -7% 175 137% 98 -44% Net Income (79) (218) -176% (1,141) -423% 900 179% 1,147 27% 1,128 -2%

Appendix 2. Horizontal analysis of the Balance Sheet between 2014-2018 (USD mn) Balance sheet 2013 2014 % 2015 % 2016 % 2017 % 2018 % (USD mn) Growth Growth Growth Growth Growth (2014) (2015) (2016) (2017) (2018) Assets Non-current assets Property, plant and 9,387 8,975 -4% 7,820 -13% 7,469 -5% 8,736 17% 8,095 -7% equipment Intangible assets 1,349 1,326 -2% 826 -38% 625 -24% 701 12% 696 -1% Investments in as- 534 592 11% 666 13% 875 31% 797 -9% 706 -11% sociated companies Other non-current 61 74 22% 99 33% 217 120% 303 40% 436 44% financial assets Deferred tax asset 269 268 0% 398 49% 426 7% 466 9% 485 4% Other non-current 278 363 31% 159 -56% 151 -5% 169 12% 318 88% assets Total non-current 11,878 11,598 -2% 10,036 -13% 9,763 -3% 11,172 14% 10,736 -4% assets Current assets Inventories 1,941 1,302 -33% 1,225 -6% 1,311 7% 1,687 29% 1,754 4% Trade and other 2,136 1,611 -25% 1,329 -17% 1,623 22% 2,082 28% 2,095 1% receivables Marketable 28 795 2787% 222 -72% 184 -17% 101 -45% 9 -91% Securities Other current 916 515 -44% 484 -6% 325 -33% 489 50% 353 -28% financial assets Income tax 164 57 -65% 21 -63% 27 28% 38 41% 103 169% receivable Cash and cash 2,351 728 -69% 464 -36% 739 59% 781 6% 1,365 75% equivalents Total current 7,535 5,007 -34% 3,745 -25% 4,210 12% 5,178 23% 5,679 10% assets Total assets 19,413 16,605 -14% 13,781 -17% 13,973 1% 16,350 17% 16,415 0% Liabilities and shareholders’ equity Shareholders’ equity Share capital 330 283 -14% 278 -2% 270 -3% 306 13% 282 -8% Reserves 6,687 5,952 -11% 5,733 -4% 3,914 -32% 5,235 34% 5,745 10% Net income at- 91 15 -84% (900) -6280% 897 -200% 1,186 32% 1,072 -10% tributable to equity holders of the parent Equity attributable 7,108 6,249 -12% 5,111 -18% 5,081 -1% 6,727 32% 7,099 6% to equity holders of the parent Minority interest 1,973 1,593 -19% 1,278 -20% 1,053 -18% 1,216 16% 1,123 -8% Total equity 9,081 7,842 -14% 6,389 -19% 6,134 -4% 7,943 29% 8,222 4% Non-current liabilities Long-term debt 2,805 1,625 -42% 1,620 0% 1,488 -8% 1,900 28% 1,263 -34% Provisions - long- 1,295 1,404 8% 1,459 4% 1,401 -4% 1,703 22% 1,705 0% term Deferred tax 312 178 -43% 236 33% 163 -31% 193 19% 183 -5% liabilities Other non-current 114 102 -10% 107 5% 76 -29% 91 19% 83 -9% liabilities Total non-current 4,526 3,310 -27% 3,422 3% 3,128 -9% 3,887 24% 3,234 -17% liabilities Current liabilities Short-term debt 1,289 1,811 40% 726 -60% 1,499 107% 663 -56% 1,229 85% Trade and other 4,309 3,463 -20% 2,991 -14% 3,093 3% 3,694 19% 3,598 -3% payables Provisions - short- 197 160 -19% 186 16% 110 -41% 155 41% 131 -16% term Income tax 11 20 87% 54 170% 9 -83% 7 -24% 2 -68% payable Total current 5,806 5,454 -6% 3,969 -27% 4,711 19% 4,520 -4% 4,959 10% liabilities Total liabilites 10,332 8,764 -15% 7,392 -16% 7,839 6% 8,407 7% 8,194 -3% Total liabilities 19,413 16,605 -14% 13,781 -17% 13,973 1% 16,350 17% 16,415 0% and shareholders’ equity

Appendix 3. Vertical Analysis of the Income Statement between 2014-2018 (USD mn) Income statement (USD % of 2014 % of 2015 % of 2016 % of 2017 % of 2018 mn) total total total total total sales sales sales sales sales (2014) (2015) (2016) (2017) (2018) Net sales 99% 20,887 98% 14,650 99% 12,624 99% 15,114 99% 19,054 Other operating income 1% 114 2% 301 1% 90 1% 93 1% 149 Total operating 100% 21,001 100% 14,951 100% 12,714 100% 15,207 100% 19,203 revenues Raw material and con- 80% 16,784 73% 10,869 72% 9,139 74% 11,271 78% 14,904 sumables used Personnel expenses 5% 1,117 6% 953 7% 852 6% 936 5% 1,000 Depreciation, depletion, 8% 1,581 20% 3,035 9% 1,118 8% 1,166 8% 1,514 amortization and impairment Change in inventory of 2% 316 1% 145 -1% (118) -1% (96) -1% (208) finished goods & work in progress Work performed by the -1% (207) -1% (203) -1% (159) -1% (215) -1% (255) enterprise and capitalized Other operating expenses 6% 1,239 6% 890 6% 783 6% 869 5% 943 Total operating 99% 20,829 105% 15,689 91% 11,615 92% 13,931 93% 17,898 expenses Operating Profit 1% 172 -5% (738) 9% 1,099 8% 1,278 7% 1,305 Interest income 0% 46 0% 28 0% 12 0% 15 0% 22 Dividend income 0% 18 0% 19 0% 22 0% 25 0% 26 Foreign exchange gains 0% 3 2% 251 1% 137 1% 176 2% 289 Other finance income 0% 85 0% 23 0% 4 0% 11 0% 18 Total financial income 1% 152 2% 321 1% 175 1% 227 2% 355 Interest expense 1% 182 1% 142 1% 126 1% 89 0% 79 Foreign exchange losses 1% 138 3% 407 1% 139 1% 115 2% 354 Interest on provisions 0% 46 0% 37 0% 31 0% 25 0% 38 Other financial expenses 1% 234 0% 66 0% 55 0% 23 0% 18 Total financial expense 3% 600 4% 652 3% 351 2% 252 3% 489 Financial (expense) / -2% (448) -2% (331) -1% (176) 0% (25) -1% (134) gain, net Income from associates 0% 81 0% 8 0% 51 0% 69 0% 55 Profit / (loss) before tax -1% (195) -7% (1,061) 8% 974 9% 1,322 6% 1,226 Income tax expense 0% 23 1% 80 1% 74 1% 175 1% 98 Net Income -1% (218) -8% (1,141) 7% 900 8% 1,147 6% 1,128

Appendix 4. Vertical analysis of the Balance sheet between 2014-2018 (USD mn) Consolidated IFRS balance sheet state- FY % of FY % of FY % of FY % of FY % of ment t (USD mn) 2014 total 2015 total 2016 total 2017 total 2018 total assets assets assets assets assets (2014) (2015) (2016) (2017) (2018) Assets

Non-current assets Property, plant and equipment 8,975 54% 7,820 57% 7,469 53% 8,736 53% 8,095 49% Intangible assets 1,326 8% 826 6% 625 4% 701 4% 696 4% Investments in associated companies and 592 4% 666 5% 875 6% 797 5% 706 4% joint ventures Other non-current financial assets 74 0% 99 1% 217 2% 303 2% 436 3% Deferred tax asset 268 2% 398 3% 426 3% 466 3% 485 3% Other non-current assets 363 2% 159 1% 151 1% 169 1% 318 2% Total non-current assets 11,598 70% 10,036 73% 9,763 70% 11,172 68% 10,736 65%

Current assets Inventories 1,302 8% 1,225 9% 1,311 9% 1,687 10% 1,754 11% Trade and other receivables 1,611 10% 1,329 10% 1,623 12% 2,082 13% 2,095 13% Marketable Securities 795 5% 222 2% 184 1% 101 1% 9 0% Other current financial assets 515 3% 484 4% 325 2% 489 3% 353 2% Income tax receivable 57 0% 21 0% 27 0% 38 0% 103 1% Cash and cash equivalents 728 4% 464 3% 739 5% 781 5% 1,365 8% Total current assets 5,007 30% 3,745 27% 4,210 30% 5,178 32% 5,679 35%

Total assets 16,605 100% 13,781 100% 13,973 100% 16,350 100% 16,415 100%

Liabilities and shareholders’ equity

Shareholders’ equity Share capital 283 2% 278 2% 270 2% 306 2% 282 2% Reserves 5,952 36% 5,733 42% 3,914 28% 5,235 32% 5,745 35% Net income attributable to equity holders of 15 0% (900) -7% 897 6% 1,186 7% 1,072 7% the parent Equity attributable to equity holders of 6,249 38% 5,111 37% 5,081 36% 6,727 41% 7,099 43% the parent Minority interest 1,593 10% 1,278 9% 1,053 8% 1,216 7% 1,123 7% Total equity 7,842 47% 6,389 46% 6,134 44% 7,943 49% 8,222 50%

Non-current liabilities Long-term debt 1,625 10% 1,620 12% 1,488 11% 1,900 12% 1,263 8% Provisions - long-term 1,404 8% 1,459 11% 1,401 10% 1,703 10% 1,705 10% Deferred tax liabilities 178 1% 236 2% 163 1% 193 1% 183 1% Other non-current liabilities 102 1% 107 1% 76 1% 91 1% 83 1% Total non-current liabilities 3,310 20% 3,422 25% 3,128 22% 3,887 24% 3,234 20%

Current liabilities Short-term debt 1,811 11% 726 5% 1,499 11% 663 4% 1,229 7% Trade and other payables 3,463 21% 2,991 22% 3,093 22% 3,694 23% 3,598 22% Provisions - short-term 160 1% 186 1% 110 1% 155 1% 131 1% Income tax payable 20 0% 54 0% 9 0% 7 0% 2 0% Total current liabilities 5,454 33% 3,969 29% 4,711 34% 4,520 28% 4,959 30% Total liabilites 8,764 53% 7,392 54% 7,839 56% 8,407 51% 8,194 50%

Total liabilities and shareholders’ equity 16,605 100% 13,781 100% 13,973 100% 16,350 100% 16,415 100%

Appendix 5. Consolidated Cash flow statement between 2013-2018 (USD mn) Consolidated IFRS cash flow statement 2013 2014 2015 2016 2017 2018 (USD mn) Profit / (loss) before tax (237) (180) (1060) 974 1322 1226 Depreciation, depletion, amortization and 1458 3035 1118 1166 1514 impairment Increase / (decrease) in provisions 19 18 (98) (12) 20 Net (gain) / loss on asset disposal and di- (6) (10) 3 14 -5 vestments Net interest expense / (income) 168 151 145 99 94 Other finance expense / (income) 125 180 30 (74) 40 Share of net profit of associates and joint (75) (8) (50) (69) (55) venture Other adjustment item (19) 49 65 (33) Income taxes paid (136) (87) (223) (162) (201) Operating cash flow before changes in 2086 1670 2200 1948 2349 2600 working capital Total change in working capital o/w: 50 (111) (105) (279) (411) (Increase) / decrease in inventories 360 19 (145) (212) (250) (Increase) / decrease in trade and other re- 382 275 (176) (459) (660) ceivables Increase / (decrease) in trade and other (718) (252) 276 354 288 payables Increase / decrease in other assets and lia- 163 (153) (60) 38 211 bilities Net cash provided by / (used in) operat- 2561 1720 2088 1843 2070 2189 ing activities Capital expenditures (1413) (1324) (1026) (1049) (1387) Proceeds from disposal of fixed assets 14 12 16 26 9 Acquisition of businesses (net of cash) (540) (212) (108) (9) 51 Increase / decrease in other financial as- (312) 680 2 (90) 137 sets Dividends received 39 31 28 120 69 Interest received and other financial income 63 34 15 21 28 Net cash (used in) / provided by invest- (521) (2211) (781) (1086) (947) (1094) ing activities Issuance of long-term notes 0 0 862 0 0 Repayment of long-term notes (133) (813) 0 (809) 0 Proceeds from loans and borrowings re- 903 6428 3749 3416 3046 ceived Repayments of loans and borrowings (1295) (6837) (3886) (3357) (2996) Interest paid and other financial costs (247) (111) (219) (181) (87) Dividends paid to shareholders (197) (151) (171) (182) (322) Dividends paid to non-controlling interest (47) (59) (9) (20) (69) Transactions with non-controlling interest (2) (22) (765) 0 0 Net cash (used in) / provided by financ- (997) (1018) (1565) (439) (1133) (428) ing activities Currency translation differences relating 81 (66) (39) 28 4 to cash and cash equivalents Increase/(decrease) in cash and cash 990 (1450) (324) 279 18 620 equivalents Cash and cash equivalents at the begin- 1256 2233 784 460 739 757 ning of the period Cash and cash equivalents at the end of 2233 784 460 739 757 1377 the period

Appendix 6. Financial results by segment between 2013-2018 (USD mn) Net sales revenues (USD 2013 2014 2015 2016 2017 2018 mn) Upstream 2,719 2,489 1,462 1,318 1,501 2,011 Downstream 21,672 18,999 13,425 10,863 13,333 16,935 Gas Midstream 1,723 458 371 317 359 356 Consumer Services - - - 3,556 4,132 5,892 Corporate and Other 899 931 735 668 793 933 TOTAL Net sales 27,013 22,877 15,993 16,722 20,117 26,127 revenues TOTAL Net external sales 48,435 20,887 14,650 12,624 15,114 19,054 revenues

EBITDA by segments 2013 2014 2015 2016 2017 2018 (USD mn) Upstream 1,641 1,235 855 652 844 1,314 Downstream 485 428 1,343 1,238 1,184 1,082 Gas Midstream 250 253 214 194 223 189 Consumer Services - - - 307 358 423 Corporate and Other (189) (98) (133) (137) (149) (154) Total 2,329 1,776 2,297 2,217 2,444 2,854

Operating profit by seg- 2013 2014 2015 2016 2017 2018 ments (USD mn) Upstream 637 354 (1,643) 132 264 532 Downstream (758) (113) 944 881 820 596 Gas Midstream 152 195 164 147 175 138 Consumer Services - - - 190 266 322 Corporate and Other (279) (184) (239) (221) (238) (255) Total (83) 223 (738) 1,099 1,278 1,334

Depreciation by seg- 2013 2014 2015 2016 2017 2018 ments (USD mn) Upstream 1,004 881 2,499 520 580 783 Downstream 1,243 541 399 356 364 486 Gas Midstream 98 58 50 46 48 51 Consumer Services - - - 117 92 101 Corporate and Other 90 85 106 84 88 100 Total 2,435 1,565 3,053 1,124 1,173 1,520

CAPEX by segments 2013 2014 2015 2016 2017 2018 (USD mn) Upstream 670 1,412 800 435 320 312 Downstream 331 667 373 390 478 617 Consumer Services 91 121 265 220 148 199 Gas Midstream 36 16 20 26 18 34 Corporate and Other 83 80 80 57 81 151 MOL Group Total 1,211 2,296 1,538 1,128 1,045 1,314